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KPMG Warns No-deal Brexit will Cause Biggest Crash in Housing Prices

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no-deal Brexit

According to the leading accountancy firm KPMG, if Britain undergoes a no-deal Brexit on October 31, the housing markets of London and Northern Ireland might come crashing down. KPMG asserted that following the no-deal, the house price crash might vary from 5.4 percent to 7.5 percent.

The analysis made by the firm also reflected the probable chances of depreciation of 10 percent to 20 percent in housing prices, if the reaction towards a no-deal is more than expected.

Following the G7 Summit in August, Johnson shifted the responsibility of no-deal Brexit over his European Council counterparts.

KPMG, after assessing the highly exposed condition of the market, released the statement in lieu of the series of warnings regarding the no-deal Brexit. The firm also said that if Britain is unable to strike a new withdrawal agreement with Brussels by October 31, the house prices would slash down across various regions of Britain over next year.

Chief economist of the firm at UK, Yael Selfin, in lieu of the firm’s statement said, “A no-deal Brexit will see households’ finances more under strain, with any rises in earnings likely to be more subdued and higher inflation depressing their purchasing power even further.”

“Add to that a rising unemployment rate and an overall decline in confidence as a result of the initial disruption, [and] you can see why people would hold off making any major financial commitments, which would trigger a larger correction in house prices.”

One of the Big Four, KPMG, also claimed that if Boris Johnson successfully strikes a withdrawal deal with the EU and avoids a no-deal Brexit by the set deadline, the slash in house prices can be avoided. Instead, there would be a steady growth in housing prices ranging from 1.3 percent to 2.4 percent across London in 2020.

Last year, the Bank of England formulated a hard-Brexit scenario and claimed that it can lead to the depreciation of a maximum of 35 percent in the housing market, although the interest rates will continuously change.

Chairing the Housing division of the UK at KPMG, Jan Crosby claimed that no-deal Brexit might lead to a steep crash in the housing prices and further affect the sales. He explained the reason as alerted owners who are waiting for the risk surrounding the market to end.

He further said that this move will “make government housing delivery targets impossible to achieve and slow new building across the sector.”

Even though the chances for a no-deal Brexit are relatively higher than Britain leaving the EU with a deal, the MPs at House of Commons still have a week to pass the legislature to block a no-deal, after returning from the summer break. With every section of the market claiming that a no-deal Brexit would be bad for the growth of the UK, will Johnson be able to strike a withdrawal deal, preventing Britain from the downfall?

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BoE Interest Threats Remain Despite Pound Sterling Soaring to New Heights

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December general elections that showcased the Conservative Party’s win, have finally woven some positive results for the British currency that has majorly seen downfalls due to the looming Brexit delays. On Wednesday, Pound Sterling crossed a key level against the Euro, a victory confirmed after the UK businesses increased substantially since the elections.

A recent survey has stated that the Pound-to-Euro exchange rate has crossed the 1.18 level. It became a clear indication of the fact that the businesses in the country were improving at an alarming rate and the similar situations, if continued, could lead to an investment revival.

In the light of continued Brexit delays, Pound Sterling has jumped and fallen innumerable times in the past, bringing in huge fluctuations in the businesses and economic growth of the country. And yet, the expectations from the government to come up with an appropriate solution to avoid the crisis have always remained.

The Pound to euro exchange rate that rocketed upwards yesterday, is so far the highest rate of the year, bringing in business and political optimism in the country. Well, the dramatic improvement approves of a significant pickup in the British economy in early 2020. It also brings in the implications that the Bank of England might opt to keep the interest rates unchanged at their January 30 meeting.

After the CBI’s quarterly business optimism rose to a near six-year high in January, the markets were doubtful that a BoE rate cut would occur by January end. The CBI tracker, which was previously seen at: -44 hit +23 in January.

Since, much of the January was a huge struggle for Pound Sterling, BoE policy makers’ decision to cut rates appeared as a warning to the markets that are eagerly waiting for Friday’s PMI surveys. It would ultimately decide their fate before BoE’s decision.  

Meanwhile, some believe that the surge in Pound Sterling came after Chancellor of the Exchequer Sajid Javid announced that the UK could secure a comprehensive EU trade deal this year. Javid commented: “There is a strong belief on both sides that it can be done. Both sides recognise that it’s a tight timetable, a lot needs to be done. It can be done. And it can be done for both goods where we want to see zero tariffs and zero quotas, and also services.”

The data from the past two days suggests that Pound Sterling has pushed above the tight 1.1655-1.1820 consolidation range, and has risen to test its highest levels of the year to date near 1.1848. Though there are chances that the British currency would rise further in the days ahead, the possibilities of a disappointing result cannot be neglected. If the latter be the case, the Bank of England will by all means cut the rates, that could add a heavier feel to the British currency over the short-term.

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Doubts Grow Over LGSS Law’s Future as Company Remarks ‘Uncertainty’

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A law firm setup by three councils to save money has raised an alarm over “uncertainties” that could risk its future prospects, after its account for 2018-19 posed a £1.2m loss.

LGSS Law – owned by Central Bedfordshire, Northamptonshire county and Cambridgeshire county councils – laid its foundation to offer a “new model” for public sector legal services. But witnessed an unexpected tide during the 2018-19 accounting year. The terms of revenue for the firm during the time fell from £8.7m to £7.8m, as losses increased from £300,000 to £1.2m.

Critics billed that fall in revenue was a sign of concern, however, an independent councilor questioned the terms of conclusion of outsourced services, while LGSS Law avowed that its finances have improved and it expects profits to show up for 2019-20.

In its annual growth, LGSS Law said: “The directors have a reasonable expectation that the company will continue in operational existence for the foreseeable future. However, the directors are aware of certain material uncertainties which may cause doubt on the company’s ability to continue as a going concern.”

As per the reports published last year by BBC, Northamptonshire had offered the firm a £1m overdraft. And the latest reports inform that Cambridgeshire has offered an extra £499,000 credit line.

The UK monetary sector had a rough 2018-2019, especially due to Brexit, which at a time looked to cause much bigger problems, than it is today. From cash flow, working capital requirement, the scale of operations and nature of business, every factor in the market came face-to-face with the unforeseen circumstances.

Consequently, for LGSS, whose business model continues to rely upon its shareholders in the firm in the form of loans, overdrafts and trade payable balances,” a lot of situations would have supposedly gone overboard.

Presently, the law firm is engaged in pursuing the higher-margin lines of business, increasing the efficiency of its free-earning lawyers and increasing its manpower in order to tackle the higher workload volumes.

Adam Zerny, leader of the independent group on Central Bedfordshire Council said, it is really a matter of concern to see losses at £1.2m, especially when the number represents 15 per cent of total company’s turnover.

“I have significant concerns about outsourcing to a third party which cannot be scrutinised in the same way a local authority can. I remain strongly opposed to legal services being outsourced, ” he added.

The clear picture of the firm is yet to be presented on various aspects, but of the overdrafts allocated by Northamptonshire County Council and Cambridgeshire, the firm has already used £950,000 and £375,000 respectively, to help the cash flow and working capital situation. Also, in order to find out how well has LGSS recovered from the loss situation last year, and if the overdraft facility has really helped or not, it is only advisable to wait for the 2019-20 accounts before taking any big investment decision.

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British Economy to Dominate France, Overhaul Germany Post Brexit

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The description of after-effects of Brexit deal has already taken a hold on every sphere in the country, with the Remainers calling it to be a huge threat to the British economy. The criticism surrounding continued Brexit delays has only led the citizens to believe in such statements.

Recently, a long-term analysis by the Centre for Economics and Business Research (CEBR) proved that the long believed facts are wrong. Instead, it has suggested that Britain will remain a dominant global economy after Brexit and will continue to pull away from France as Europe’s second-largest economy.

British economy, despite many failures and delaying Brexit, has successfully maintained its position in the past three years in comparison to French economy. Since, the EU referendum of 2016, France has failed to overtake British economy.

The analysis has proved that if the same pattern is followed, Britain’s output should be “a quarter larger than the French economy” by 2034 and is even expected to overhaul Germany in six years and Japan by 2034.

Immigration has played an important role in the country. With lowering property prices, more people are immigrating to the UK, which is getting benefitted by young population’s strong performance in the technological, pharmaceutical and creative industries – this would in turn boost Britain’s economy. 

However, the overall effect of Brexit over property prices in 2020 is impossible to predict.

The CEBR believes that Britain’s close ties with the US would reap benefits over the coming years, as the former seeks advantage of the strengthening “Anglosphere”. It has even stated that the countries that are successful in attracting migration tend to grow even faster.

Recently, the Queen’s speech on overhauling immigration and social security co-ordination bill proposed an Australian-style points based system to end free movement in the law. It also stated that from 2021, the EU citizens arriving in the UK will be subject to the same immigration controls as non-EU citizens.

The overhaul would also signify the fact as to if the UK’s world-class research universities and pharmaceutical sectors would remain affected post Brexit. The surveys of existing academic research of 2017 and 2019 found that the credible estimates ranged between GDP losses of 1.2–4.5 percent for the UK, and a cost of between 1–10 percent of the UK’s income per capita, with future warnings against Brexit.

Only the final result, as to if the country would have a hard or soft Brexit, would determine the impact on British economy. Since, the EU has a strong positive effect on trade, it is unclear what impact would Brexit have on foreign investment, followed with immigration and whether or not would the country meet the same fate as stated by the CEBR analysis.

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Seven Major British Banks Pass Tests Conducted by Bank of England

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Bank of England (BoE) is taking measures to tackle any economic crisis that might ensue post-Brexit, despite the landslide victory of the Conservative party in the recently conducted general elections and certainty finally settling on Brexit.

On Monday, the BoE said that it has decided to change the rules on the capital that British banks must hold so that the economic crisis could be avoided. On the other hand, the BoE issued a warning, saying that while the banks can tackle recessions, they can experience concerns if they do not reduce the staff bonuses and shareholder payouts.

Besides issuing a warning about the possible impact of economic crisis, the Bank of England conducted an annual financial sector health check on the major banks of the country. The tests determined if the banks can offer loan to the households and the businesses during recession, without raising their capital to billions.

As per the BoE, Royal Bank of Scotland, Barclays, HSBC, Lloyds, Standard Chartered, Santander UK, and Nationwide Building Society have ‘passed’ for the second consecutive year.

However, the central bank also warned that to avoid raising the capital to billions, major British banks will need to cut dividend payments, banker bonuses, and coupon payments on their corporate debt.

Bank of England Governor Mark Carney, in response to the changes introduced, said, “These changes improve the responsiveness of capital requirements to economic conditions by shifting the balance … towards buffers that can be drawn down as needed”

According to the changes introduced by the BoE, while the average amount that banks need to have remains the same, the amount can be modified during the economic cycle. 

The test that BoE conducted was based on a global market depreciation which would include increasing debts that would take a toll on the US, Chinese and Eurozone economies.

One of the reasons responsible for the increasing debt levels is the increasing level of riskier loans, also known as leveraged lending, that amount to a total of £90 billion.

Addressing the leveraged lending, Carney said, “The sharp build-up in leveraged lending, particularly into the United States, the releveraging of corporate America, is an area where we do see there has been a steady build-up of risk. The quality of those loan books has deteriorated.”

As of now, it remains unclear if the main British Banks will be affected due to the possibility of recession and if the changes introduced by the Bank of England will mitigate the impact or if the post-Brexit scenario will end any possible chance of recession that might impact the UK’s economy.

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Pound Sterling Records Major Growth as Polls Suggested Conservative Majority

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With exit poll promising conservative majority in the general elections, Pound Sterling witnessed a steep surge of 2.5 per cent to reach at $1.351, the highest level Sterling has achieved against the US dollar since May 2018. On the other hand, the currency reached €1.207, the highest level against euro since December 2016.

While the 2.5 per cent surge took place during late hours on Thursday, currency cooled down a bit during the early trading on Friday and stood at $1.3393 against the US dollar.

According to the analysts and investors, the surge indicated that the fund managers wanted to have some certainty on Brexit, Britain’s economy and the conservative majority provides same.

Speaking on the surge, Seema Shah, chief strategist at Principal Global Investors, said, “The market is now pricing in some certainty about UK politics but, more importantly, some certainty about Brexit. This should be a path to a stronger economy, at least in the short term.”

This is not for the first time, Pound Sterling has witnessed a growth due to a decision surrounding politics. The currency had been under direct effect of political development since the public referendum in June 2016.

On the other hand, the currency has seen a continuous growth against the euro and dollar lately, mainly due to the opinion polls that indicated conservative majority as the likely result of the December 12 elections. 

Apart from the UK Shares’ FTSE 250 index that shot up by 4.3 per cent due to exit poll verdict, the FTSE 100 soared by 1.8 per cent. The growth in FTSE 100 indicated the crucial responsibility on blue-chip stocks due to the growth registered in pound sterling.

Besides the FTSE index, utility stocks like National Grid and Royal Mail registered a growth of 7 per cent and 10 per cent respectively. Furthermore, the domestically focused retail banks like Royal Bank of Scotland and Virgin Money experienced a surge of 10 per cent and 18 per cent respectively, following the news of conservative majority in the parliament.

Speaking on the growth experienced by the country’s market, Senior European Economist at Legal & General Investment Management, Hetal Mehta said, “With this result the UK could start becoming more of a normal country again from the point of view of international investors. Some overseas investors had said you can’t invest with this level of uncertainty, or the possibility of a Labour government that would carry out nationalisations.”

Now that the Conservative Party has secured a win in the elections, it remains to be seen if the country’s economy and market will prosper with post-Brexit policies and Boris Johnson will fulfil his promises or not.

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