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Climate change, UK banknotes and the National Living Wage: Janet Hontoir's April news round-up

06 May, 2016Janet Hontoir

From Greek debt and US economic growth to J.M.W Turner and banknotes, here are some of the biggest financial news stories of the month, compiled by Janet Hontoir, Academic Course Leader for ifs University College's BSc (Hons) Banking Practice & Management.

1 Growth in US and UK slows 

US economic growth slowed to 0.5% in 2016 Q1, a sharp decrease from the 1.4% in 2015 Q4 which we reported in last month's News Roundup. There are several reasons for this trend. There has been a slowing in domestic consumption, which accounts for more than 66% of the US economy, and this has reduced business stock-building. The strong dollar has meant a slowdown in exports. And oil and gas exploration has fallen by 86% following the deep fall in oil prices; cheaper oil has boosted consumer spending but it has also meant lower profits for firms which depend on the oil industry.

UK growth also slowed, to 0.4% in 2016 Q1, largely due to a fall in manufacturing and construction output, although the service sector grew by 0.6%. The annualised growth rate is 2.1%. Some blame uncertainty over the EU referendum for the fall in investmentbut there are other factors such as low productivity and weak exports.

2 Opec fails to reach agreement on output cap

Most members of Opec attended talks in Qatar to discuss placing a cap on oil production in order to push the price back up but the meeting ended without agreement, saying that more consultation time is needed. Prices fell further on this result. One of the problems appears to be tensions between Saudi Arabia and Iran, the latter of which did not attend the meeting. Saudi Arabia is willing to freeze output only if all other Opec members do so but Iran intends to continue to increase its production; it has been doing this since international sanctions were lifted against it earlier this year. The next Opec meeting is due to be held in June.

3  Another Greek debt crisis threatens

Another Greek debt crisis appears to be looming, with the possibility that Greece may be forced to default on its July debt payment of €3.5bn. The country has not been able to unlock the next instalment of its loan because the government is unwilling to carryout the austerity reforms which have been imposed by its European partners and by the International Monetary Fund as a condition of the loan instalments being released.

The creditors want Greece to make an additional €4bn of savings as a contingency against missing future budget targets but the Tsipras government refuses to take any 'additional actions' on top of making spending cuts of €5.4bn by 2018 which it has already agreed to. Mr Tsipras made a request to the EU Council for an emergency meeting to end this stalemate but President Tusk says that any negotiations must take place with finance ministers.

4   RBS pays final dividend to Treasury but reports higher quarterly loss

Royal Bank of Scotland has reported a loss of £968m for 2016 Q1 compared with a loss of £459m in the same quarter last year. The bank would have made a profit of £225m but it was obliged to make a dividend payment to HM Treasury of £1.193bn in March 2016. This was the Dividend Access Share (DAS) dividend and was the final such payment to the Treasury as the DAS has now been retired. However total revenue fell by 13% to £3.06bn.

RBS has also announced that 'there is a significant risk that the separation and divestment of Williams & Glyn will not be achieved by the deadline of 31 December 2017'. This is due to 'the complexities of Williams & Glyn's customer and product mix' and 'the programme to create a cloned banking platform continues to be very challenging and the timetable to achieve separation is uncertain'.

5   Co-operative Bank's losses rise

The Co-operative Bank has announced pre-tax losses of £610m for 2015 [PDF], more than twice the bank's 2014 loss of £264m. To put this situation into context, it must be remembered that the Co-op Bank almost collapsed in 2013 after discovering a £1.5bn hole in its accounts, due to toxic property loans; and it failed the Bank of England's stress test in 2014.

Since its 'rescue' by the purchase of equity by hedge funds, the bank has taken action to cut its operating costs via branch closures and staff cuts. But it is still making large PPI provisions (£193m in 2015) and it will take the bank some time to shed its high-risk mortgages in order to comply with capital adequacy regulations; and making losses reduces capital. CEO Niall Booker expects a loss in 2016 but hopes to return the bank to profit before the end of 2017. One positive factor is that the bank has been able to retain its retail current account holders.

6   National Living Wage for the over-25s

The National Living Wage came into force in April. This requires employers to pay at least £7.20 per hour to workers aged 25 and over; those aged between 21 and 24 will continue to be covered by the National Minimum Wage of £6.70 per hour. It is expected that the NLW will mean an immediate rise in wages for 1.8m workers, although it discriminates between under-25s and over-25s doing the same work. On the other hand, it will present problems to employers, and especially to small businesses, who are working on narrow profit margins and who will struggle to pay higher wages.

7   City house price inflation rises in Q1

Hometrack is a company which provides market intelligence in the residential property market. It publishes a monthly UK Cities House Price Index which monitors property prices in 20 UK cities. The March 2016 issue shows that, in 2016 Q1, house price inflation in the 20 cities was 4.2%, with Liverpool registering the highest growth rate, although from a lower base. The quarterly figure was unusually high and the normal 'spring bounce' was boosted by the rush by buy-to-let investors to beat the increase in stamp duty. The prices of houses in UK cities are expected to moderate over the rest of the year, especially up to the EU vote because of uncertainty over the result.

8 Barclays offers apology and refund to PPI customers

Barclays has sent letters of apology and missing annual statements to 10,000 PPI customers and offered them PPI refunds plus 8% interest. This is to rectify a breach of an order in 2011 by the Competition and Markets Authority which required providers to send an annual statement to all PPI customers setting out the cost of their policies and reminding them of their right to cancel. Investigation by the CMA revealed that 9,404 credit card customers and 740 mortgage customers had not received their annual statements. Barclays has now rectified the omission and has promised there will be no repeat of this in future.

9 New banknote to feature British artist

The Bank of England has announced that the next £20 banknote, which is due to be issued by 2020, will feature J. M. W. Turner, the great British artist. Governor Mark Carney said that 'Turner is perhaps the single most influential British artist of all time'. Turner was selected after the Banknote Character Advisory Committee invited the general public to suggest a person from the visual arts. 'The Bank received 29,701 nominations covering 590 eligible characters.... and then produced a shortlist which it discussed in detail with the Governor, who made the final decision'. The design on the reverse will include Turner's self-portrait and part of his most famous painting 'The Fighting Temeraire'.

It has also been announced that the Royal Bank of Scotland is to issue a new £5 banknote later this year. The note will feature the Scottish novelist and poet Nan Shepherd. Scientist Mary Somerville has already been chosen for the £10 note which will be issued during 2017 and they will be the first women to appear on the bank's notes. They too were chosen by a public vote. In Scotland three banks are allowed to issue banknotes – the Bank of Scotland, The Royal Bank of Scotland and Clydesdale Bank.

10  175 parties sign the Paris Agreement on climate change

At the UN headquarters in New York, 175 parties including the European Union signed the Paris Agreement on 22 April, Earth Day; 15 nations had already ratified it, these being mostly small island states which have the most to fear from climate change. UN Secretary General urged 'all countries to move quickly' so that the Agreement 'can enter into force as early as possible'.

Countries which have not yet signed have one year to do so; but it will take time for all 28 EU member states to ratify. The BBC's Science Editor David Shukman writes that President Obama is keen to see the agreement come into effect before he leaves office in January 2017 as the treaty contains a clause stating that it would take four years for any new leader in a country to leave the agreement.