China has finally admitted that economic growth is starting to slow. Premier Wen Jiabao has set a lower-than-usual 7.5% growth target for his final year in office.
This will be no surprise to regular readers. We’ve been predicting a Chinese growth slowdown for a while, notes Matthew Partridge.
“China’s economic successes over the past 30 years have obscured the fact that its institutions still have plenty of room for improvement, and that the state controls much of industry. That’s fine at the early stages of development. It’s one way to get things done quickly. But as it gets richer, these problems start to matter more. This will make it more vulnerable to shocks.
“The Chinese state uses a mixture of carrot and stick to keep citizens in line: the carrot is ongoing economic growth and improving standards of living. This means the government is anxious to show that the economy is advancing quickly – even when it clearly isn’t.”
Another problem China watchers face is that data isn’t too reliable. There have been five periods of very low growth between 1979 and the present day. And none of these have shown up in official figures, as we noted in MoneyWeek Asia last December.
Now, “it’s clear that Wen Jiabao is managing expectations lower”. He also made noises about economic reform. However, that’s like a politician resigning ‘to spend more time with my family’ – you know that it’s just an excuse”, says Matthew.
What does this mean for markets?
China’s economic growth has made it a major raw materials consumer. It accounts for around 40% of global copper and aluminium consumption. So industrial materials could be badly hit by a growth slowdown, as John Stepek noted in January.
Meanwhile commodity driven economies, such as Canada or Australia, are also likely to suffer. High commodity prices and easily available credit have fuelled housing bubbles in both countries, as David Stevenson has written about recently here and here.
And that means the currencies of both countries could soon suffer.
UK house prices are on the way down
The Aussies aren’t the only ones who should worry about house prices falling. As John Stepek pointed out in Tuesday’s Money Morning, the British housing market is also looking shaky.
Unlike Australia or Canada, though, we’ve already suffered a biggish house price drop. “The average UK house price is now £160,118. That’s nearly 20% below the August 2007 peak of just under £200,000 (according to the latest Halifax figures). That’s quite a fall – throw in inflation, and it’s even more significant”, notes John.
“With sellers reluctant to move and mortgages hard to come by, the housing market hasn’t so much crashed as been put in the deep freeze.”
And now, “Halifax is raising its standard variable rate to 3.99% from 3.5% on 1 May. That doesn’t sound like much. And in the big scheme of things it isn’t. It’s about £40 a month extra on a £150,000 repayment mortgage. According to thisismoney.co.uk, roughly 850,000 borrowers will see their payments rise. But Halifax isn’t the only one. RBS/NatWest have raised some of their rates too.”
So with bank rate still at 0.5%, what are the banks playing at? “It’s not actually the Bank of England rate that matters when it comes to how much banks charge you to borrow money”, says John. “A bank gets money from one place at one price and lends it out at another, higher price.
“It has become more expensive for banks to raise money in the wholesale markets in recent months (although it’s eased off a little in recent weeks). It’s also getting more expensive to raise money from savers. Fed up with inflation eating their cash savings, people are increasingly investing, rather than saving. If the banks’ funding costs are rising, then what they charge us will rise too”.
This could have a big effect on the UK housing market. With some reports suggesting that as many as one in six borrowers regularly have problems meeting their repayments, this rate hike could be the final straw, especially if unemployment continues to rise. And repossessions could start to rise again in 2012.
Yet inflation still threatens your savings
Staying in the UK, just a quick word about inflation. This is a scourge for savers. The higher inflation rises, the more the real value of your savings is eaten away.
Sure, inflation in Britain is dropping back a bit. But don’t be fooled. This simply means that prices are rising less quickly than they were.
And it’s a topic that David Stevenson is taking very seriously. He believes a rising cost of living still remains one of the biggest threats to your wealth.
The video is about four minutes long. But if you don’t have time to watch it all, just pause it and read the transcript indicated on the screen.
Is the ‘oil gamble of the decade’ about to pay out?
One major cause of inflation, of course, is soaring oil prices. This is putting shares in oil producers under the spotlight. And few people are better at finding great opportunities in the sector than MoneyWeek’s penny shares expert Tom Bulford.
Tom’s been keen on the Falkland Islands oil story for years. Since Argentina began to ratchet up diplomatic pressure on the UK, this has become worldwide news.
In this week’s free Penny Sleuth newsletter, Tom has a follow-up idea. He reckons some of the less publicised fields could turn the area into a major oil province.
“So far, recent drilling in the Falklands has been confined to the shallow water northern basin”, he says. “With Rockhopper now focussing on bringing Sea Lion into production, further exploratory drilling in the northern basin is unlikely until 2015, so the focus is now on the southern basin”.
“On 31 January Borders & Southern (BOR) spudded its first well in the ocean to the south of the Falkland Islands. It said that this operation would take about 45 days. That means we should now be less than a fortnight from discovering whether it strikes oil. With 2 April marking the 30th anniversary of the start of the Falklands war, and the price of oil edging up towards fresh highs, a storm is brewing and success for Borders & Southern could turn this into a hurricane”.
In all, the four prospects he’s looking at have estimated potential resources of almost eight billion barrels. That’s three times current UK oil reserves.
As for the threat of more pressure from Argentina, Tom doesn’t think investors should panic. In fact, he says, the Falklands remains the “oil gamble of the decade”. If you want to stay on top of this great story – and Tom will be watching every move – just sign up here for his free Penny Sleuth newsletter.
How to profit from takeovers
Companies love takeovers. They are a chance for chief executives to grab the headlines and build a ‘legacy’. It’s also a nice earner for corporate bankers and advisors who are always keen to push ‘a great target that will offer great synergies’.
The trouble is these takeovers rarely work out well for shareholders in the firm that’s doing the taking over. So this week, MoneyWeek deputy editor, Tim Bennett, decided to take on the takeover myth. In his latest video tutorial he investigates why they are so popular and how smart investors can use them to make a quick buck.
To hear about other bits and pieces on the internet that have amused us or made us think, sign up for our Twitter feeds – we’ve listed them below.
Have a great weekend!
• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• James McKeigue
• Matthew Partridge
• David Stevenson