Simon’s Economic Update

 Firstly, you will have noticed the new name. Tarvos is a derivation of Taurus and the change has been necessary in order to enable us to register the name as a unique trade mark in the financial services sector. Rest assured the underlying business, and people within it, are still the same. We are however adding a further member of staff this month, Linda, and I am sure that many of you will get to meet Linda over the next few years.

 Apart from the name change, this letter coincides with the inaugural speech of the new Governor of the Bank of England, Mark Carney.  I thought that it would be an opportune time to update you all on my views of the economy, and whether we are still in dire straights or are well on the road to recovery.

 In the past the Bank of England has often bemoaned the fact that it has one enemy to attack (inflation), and one blunt instrument with which to bludgeon it (interest rates).  In many ways this will not change, however Mr Carney brings with the job a higher degree of openness and a new slant.  He will now look at key indicators for the economy, particularly jobless figures before moving interest rates.  If that means that inflation moves up somewhat in the meantime, then he will probably allow that, rather than increasing interest rates, which would curtail any hope of recovery.  The jobless total, currently 7.8%, will be used as a measure and Carney has indicated that until the percentage of unemployed falls below 7%, the Bank of England will not be looking to raise interest rates, and possibly not even then.

 So what does this mean for you our clients?  Clearly the economic recovery and getting people back into work will be top of the agenda.  This means that ensuring that savers get a better rate on their deposits will not even be considered.  Indeed it is not in the interests of the Government of the Bank of England that savers sit with money in cash for any length of period.  Therefore for the short term,  probably for the medium and maybe even for the longer term, those looking for growth on their invested money and/or income, will need to look elsewhere.

 We spend a great deal of time looking at interest rates for our elderly clients and trusts and since the speech there has been a distinctive rate move downwards.  Added to this inflation (CPI) fell to 2.8%, with only rising fuel prices keeping it this high.  The bottom line is that all efforts are focussed on ensuring the economy moves out of recession in a steady fashion.

 The other big story over the past couple of weeks has been the apparent emergence of the Eurozone from its biggest recession since 1999.  A recession is when the economy of a country or economies of a group of countries (Eurozone for example) contract for at least 2 quarters in row.  The Eurozone had contracted for 7 quarters consecutively before growing 0.3% last quarter.  Deeper examination shows that the core countries such as Germany and France advanced, but Spain, Italy and other peripheral countries still saw their economies contracting.  Further indication that we are starting to see a two tier Europe with no real system for assisting the underperformers, unlike the USA.

Unless a way is found to deliver more integration there remains a risk that some members may pursue their own individual economic interests and go their separate ways.  This, of course, could make the core countries stronger.  Much will depend on political will.

 So what does this mean as far as us advising on your portfolios?  We are pulling out of  recession slowly and so is Europe, but it is a fragile growth.  We continue to believe that the correct strategy is a properly diversified portfolio.  Also, as I have said to many people, there is no “no risk” solution nowadays.  Deposit funds will fall in value against inflation, and are useless for income.  However they are still the best for short term and emergency needs.

 Me, Ruth and all of the team at Tarvos look forward to continuing to advise you for many years to come.  Do please contact either Ruth or myself if you have any queries.

(August 2013)