Why is London gloomy and what threatens us in the nearest future

Especially form London for ‘Sakartvelos Ekonomika’ Emzar Jgerenaia, Ana Jgerenaia

They don’t smile in the City as they used to before. If you had asked them: why is London so gloomy, they would have quickly given you an answer: This is a misty Albion! However the definition is wrong!!! The situation has changed.

The sun favors London, although the same is not truth about Inflation and economic conditions. This is not a simple rhetoric, this is a reality that has caused troubles to City – economic activity as well as PI index has declined, GDP index became alerting. The whole summer has been a period of decline for leading European stock exchanges, including House FT 500 and S&P indexes. Prices on food and oil alerted London City – the world financial centre. Future cataclysms, earthquakes can be best felt here. It will definitely reach Georgia and will refer to Georgia’s economy too. So, what exactly has worried the world financial centre???
1. New economy unfamiliar to scientists and economists is starting – prices on major materials are permanently increasing, revenues of leading corporations are also increasing. For instance, Shell revenues in 2007 exceeded 15 billions. Number of leading corporations is also increasing. Market is expanding and the reason of it lies in technological changes. The world faces increase of general incomes and wealth, consumption has also risen including in such poor countries like India, China and some African states. Raising prices on raw materials, fight among producers, transporters and consumers, regulation fight, expanded resistance of developed countries to keep their domination over technological favorites and transnational corporations. According to all earlier mathematical models or economic theory deep recession should have already existed. Yet, it does not exist. What will happen tomorrow? Government, as well as Gordon Brown, thinks about it. Members of the Labor party publish a new plan. They meet to discuss the introduction of new taxes for the rich. Those whose revenues exceed 100 000 GBP will pay 50% more taxes. The London famous Black Cab drivers annually earn 80 000 GBP. That’s right – eighty thousand GBP (the drivers have special skills. It takes 2 years for them to learn streets of London by heart. They never carry maps with them unlike their European colleagues. They do not even have satellites unlike taxi drivers of other capitals. They know exactly where to go, they are familiar with all streets, even small corners. These drivers study streets of London during two years and take strict exams).
Brown did not support the tax increase, in spite of a fact that he belongs to the Labor party. However, they say the issue is still being discussed within the party. The other considered matter in the House of Commons was repatriation of transnational corporations’ revenues, their protection from double taxation and exchange rates changes. Although the most important issue – increased prices on products and fuel remained without particular attention. It is not discussed on Downing Street and no one knows what will happen next.
Jonathan Swift wrote in 1724 – ‘Whoever makes two blades of grass or two ears of corn grow where only one grew before serves mankind better than the whole race of politicians’. These words are of particular importance nowadays. The world worries about increased prices on food and fuel. The above said was discussed at G8 summit that took place in Japan. Attendants spoke about major problem of developing countries, especially African countries – insufficient food. Anyway, the summit could not solve anything for mankind although millions were spent on its arrangement. Experts believe that the spent amount was enough to feed starving population of Darfur for another month or to restore destroyed economy of Kenya. On the other hand, the same problem threatens developed countries as well. Not because there will be a lack of food, but because their prices will be too high and people’s purchasing ability will be too low. The broken balance concerned megapolises first of all. There are about 7.5 million local inhabitants in London and probably minimum 2.5 million tourists and workers. Even Londoners leave the city because of high prices. The same refers to all other capitals of European states: Athens, Helsinki, Vienna. Although the issue of exchange rate is particularly actual in London. It seems that Economic theory of famous Scandinavian economic school has established with great changes and probably it doesn’t work.
The thing that costs 3 Euros in Paris, lets say coffee, can be bought for 3 GBP here. Kruasan costs 1 GBP in London and 1 Euro in Paris. Price on meat and cheese are 4-5 GBP more in London than in Paris and Vienna, while Euro is minimum 25-30% less than GBP. The only thing that became cheaper in London is residential houses. They cost even cheaper than houses in Tbilisi. 1 sq. meters of living space around Chelsea amounts to 1600-1700 GBP, around 2000 Euros – 3500 USD. This is a price of a ready, built flat and arranged communications. Flat in the same conditions in Tbilisi, near Chavchavadze or Rustaveli ave. costs not less than 5 000 per sq. meter.
The same reduction of prices refers to electronic appliances as people do not buy them with the same enthusiasm. Electronic appliances sales indicator fall with 13.5% in 6 months of 2008. Financial Times published Andrew Taylor’s and Delphina Strauss’s research in its 16 July edition that overviews current situation in England in details. Increasing prices was compared to a crisis that took place 16 years ago. This type of inflation existed 16 years ago, it increased with 3.35% in May (annual indicator), it reched 3.8% in June (national Statistics Office).
Target of Bank of England was 2%, while food prices are 10% more compared to previous year. Fuel prices grew with 5.3 pence last month and reaches 1.177 GBP, 3.6 Lari per liter. By the end of July fuel price grew to 1.22 GBP. According to Thomson DataStream and Bank of England the following price increases took place during 12 months: fruit – 8.2%, bread – 11.9%, cheese – 19.1%, meat – 11.2%, fuel – 24%. Prices decreased with 21.7% on consumption goods and electronic appliances.
Total annual growth:
On food and alcoholic beverages 9.5; On transport 7.3; Communal services – gas supply, electricity 7.0; Wearing minus 7.5%.
Besides, British inflation rate seems to be a shock for Europe – if we take the indicator of 1970 and compare Germany, France, US we’ll see that England wins all records, of course after the US. In 1965 annual inflation rate in England reached– 27%. In France it was 17%, in the US it was 12% and in Germany – 7%. These were the years of great crisis. The same alarming level was in England in 1980 – 21%. France and United States then had 14% and Germany kept 9%. Since 1985 when Soviet Union began to collapse and War of Afghanistan created favorable environment for economic growths as well as for developing regional economics for the West, inflation did not exceed 4% till 1992. In 1992 it reached 7-8% in England and United States, 7% in France. Since then Allen Ginsberg has been keeping 1-3% inflation level and the world was sustainablly developing. Allen Ginsberg left his position and Ben Bernanke had to take up this post when oil price grew from 25 dollars till 145 dollars per barrel in April 2004. The same drastic increase applied to food and metal prices. Gas and electricity prices also increased and inflation rate reached 4.3% in United States, 3.8% in England, Germany and France. This was the highest indicator over the past 16 years. So, what will happen next? The question remains unsolved in City as well as in gawning stritze. Neither did G8 summit lead to any change.
By the middle of July prices on milk, bread and egg increased with 21%, fuel price increased with 3 pence in July. This is what Gordon Brown speaker commented upon the fact: ‘ We notice these changes, however this takes place all around the world’. By the way, leaders of all countries say the same: ‘what can we do? It’s the same all over the world’. Paul Kenny ,of GMB union ,said: “The Government will pay a high price at the polls if it does not take more active steps to curb speculation in the oil market, Which has hiked the price of everything, and take steps to dismantle the energy regulatory regime left by the Tories, which has delivered the highest electricity and gas prices in Europe”(p-4)
TORy-lilderi David Cameron- is quite interesting (probably future prime minster). Criticizes blame Gordon Brown administration for careless spending of budgetary resources, for creating a new atmosphere and for not finding a way out of this difficult situation. Although Gordon’s atmosphere is more important and matters more. Experts also believe that GBP was over estimated over the past 16 years. Soros created a catastrophe to GBP in 1992. Today it faces dilemma. This year GBP fell against Euro with 11%. We can say that it is just a beginning.
Besides, United States declared in July that their priority is inflation, not an economic growth. Following the announcement of Ben Bernanke it’s possible that FED raises refinancing percentage in September and USD rate becomes stable. In this case GBP will face even more obstacles. Experts pay a lot of attention to City budget deficit, payment and trade balance deficit as well as the growth of foreign debt. All the above mentioned factors affect GBP rate. Local mortgage loan debt per capita reaches 136% in Britain and 106% in United States. Well. this is only a beginning. As experts have informed us, the debt on credit cards, current debts also increase. 10% of European GDP growth is related to England, as well as 30% of credit card debts. It’s not only government that is suspected for overspending money, but also population, as they spend more compared to revenues. Gordon Brown tries to increase taxes; therefore they will go back to 10p privileges law. Besides 5% limit of trade balance that England has overcome is alarming for it unlike for United States, as the major partner with deficit balance is China. United States has set up relations with China. The latter buys state bonds from the United States. It’s not the same way with England. China will further continue to buy US bonds and to support USD. Therefore USD will become more stable unlike GBP. This will take place for minimum 2 years. Consequently GBP rate will fall in coming period of time. Another argument of the statement that GBP rate will decline as well as Euro rate is that Britain will not be able to decrease trade deficit if the exchange rate does not decrease. None of the states managed it. As we have already mentioned GBP is overestimated. GBP and Euro, both rates will decrease against dollar in 12 months. These processes will naturally affect Georgia as well. According to all calculations Gel exchange rate will drop against USD in coming three months. As for Britain, its main problem is that it became too depended on China. The same applies to Europe. Entire industry has moved and Britain is left without production. However, let me emphasize the fact that salaries annually increase in China with 19%; transportation costs from China to Europe also increase. In the end, Chinese effect declines. As a result, it has been concluded in City that making business in Asia is not as affective as it used to be in the past. The reason of worry lies in a fact that production has still been shifted to Asia, despite its less effectiveness and less profitability. Price increase on raw materials has significantly damaged business in Asia.
Below you can find prices on coal in China and Europe, information provided by FT:
In Europe during the period of January – July 2008 it increased from USD 125 to USD 225 per tone. In China it increased from USD 50 to USD 175.
Therefore, production expenses in China including raw materials, salaries and transportation drastically increased with 28% in 2008. we can conclude fro all the above said – Europe will face production crisis and decline in currency exchange rate. Major challenge is related to price increase on food and energy carriers. Everything should be rearranged here and everyone, including Georgia, should work out own strategy. Considering future raise of USD exchange rate, European currencies will decline and there will be a stable price increase on raw materials. In addition, as it has been mentioned before, production has moved to Asia. It gains priority in several sectors: consumption as well as export for Georgia. Europe and Britain remain attractive from the point of tourism. Arabians and Asians go there for sightseeing, studding, they visit Europe to enjoy themselves. Ancient Europe becomes the world of service, financial centre, not the world of production. They are really concerned about it in the City, that’s why they look so gloomy.
One thing is certain – new type of economy is developing in the world and London tries to be prepared for that. They feverishly seek the new style.
Maybe we could do the same. For short term period it may even be a way out for Georgia too.
City worries about a fact that PPI index declined with 2.3%, prices on materials have grown, Asian products have flooded England. All companies, including famous textile enterprise move their enterprises to China or Vietnam and supply their country from there.
Prices have grown on transport monthly ticket in London tube and bus. In central zones it costs 100 GBP (300 Gel), full coverage costs 144 GBP.
Union of Taxi (Cab) divers arranged a meeting in July and discussed the price increase on famous London Cab and decrease of general work volume due to high prices on oil. Besides, London became the most expensive city by car parking – monthly parking price reaches 585 GBP in the centre of London, 565 – in West End of London. This amount equals to about 1700 Gel. London City Hall limits the poor to use their own cars in the city.
Cabinet of Brown has found a way out – he, as a real member of Labor party, increases taxes. On the other hand, population’s revenues have been decreasing annually since 2001. Europe faces new, drastic changes and these changes are not so far away from us.