“Aim at heaven and you will get earth thrown in. Aim at earth and you get neither.”
- C.S. Lewis
(Photo taken with a HTC One X smartphone above Southern UK during descent)
Many commentators have today written about how the rate of decline in the Eurozone has accelerated, with activity in manufacturing, services & output data all reaching 3 or 4 month lows. However, few are singling out France which is now in a steepening decline not seen since the peak of the 2009 crash. Its economic data is so bad it is well below the EU average and risks making Spain look in good shape!
Here is the latest PMI data released today (numbers below 50 = contraction):
It is my personal belief that several policy decisions of the Hollande government have contributed to this decline. There is a flight of French millionaires to places like Belgium and London due to the threat of a 66-75% tax rate on their income. Far worse in my few is a tax on entrepreneurship, which sees capital gains from investments in small business be taxed at over 60% … a massive discouragement to investors to risk their capital in France. That tax rate is double Germany’s and nearly triple Spain’s. This will have long-term damage on France’s economic future if not reversed. I’ve wondered for years why an entrepreneur would start any kind of international business in France, there are only disincentives.
France is now, finally, trying to reform in small ways to regain some competitiveness. The unions appear ready for compromise as large manufacturers face a real threat of bankruptcy. However 80% of France’s deficit reduction plan has come from raising taxes which is a major drag on any economy. This is stark contrast to the tax cuts for business and other measures being taken in the UK to stimulate job creation.
Until France does something about its extremely high tax burden (top 10 in the world), I fear the private sector will continue to fail to create much-needed employment. 10.6% of France’s work force is currently unemployed. This hits younger people the hardest, 36% of whom cannot find a job.
It seems that Honda are indeed keen to return to F1, with the change in engine rules their best chance to come back as an engine manufacturer. It has been agreed that F1 teams will need to change from 2.4-litre V8 engines to 1.6-litre turbos in an effort to reduce costs and also make F1 technology more relevant to road vehicles. This switch will happen in 2014.
This is therefore Honda’s opportunity to maintain its strong engineering reputation and team up with McLaren once again. McLaren Honda won four F1 championships back-to-back between 1988 and 1991 with Alain Prost and Ayrton Senna as drivers. In 1988 McLaren Honda won 15 out of 16 races! Both companies will be keen to rekindle this dominant partnership.
It makes perfect sense that McLaren would like to be less reliant on Mercedes who are now focussed on their own F1 team, which looks to be in good shape for the 2013 season.
McLaren’s current deal with Mercedes comes to an end once the 2013 F1 season finishes, however it is believed that McLaren have the option to extend this one or two years further … giving them time to make the transition to Honda (and probably make comparisons vs the 2014 Mercedes power unit to be sure!).
Honda will join three other car manufacturers are engine suppliers in F1, alongside Ferrari, Mercedes and Renault. There have been rumours that Cosworth may also attempt to come back.
More competition can only be good for F1!
The UK media (particularly the left-leaning publications) continue to rant about how austerity is strangling the UK economy and that the government should be doing more stimulus such as infrastructure projects, etc.. GDP growth for 2012 will likely be flat and the so-called experts will rave about stagnation and failed government policies.
However, pre-2008 crash, UK GDP was 54% government spending, so using GDP as a measure of how the economy is fairing is misleading. Especially if the government is having to borrow some of that money to spend! What good is 1% growth in GDP if our deficit is 8% of GDP and we’re paying interest on what we borrow?
No, a sustainable recovery can only be created by the private sector – increasing both GDP and tax receipts – and the signs are that this is now happening. The UK government claims 1 million private sector jobs have been created since they took power in 2010. They have also continued to cut corporation tax making the UK one of the most attractive places to do business in the G20.
Headline GDP figures would be a lot better if the UK could fix its housing market. The chart below says it all:
This chart was created by the Bank of England and clearly shows that UK banks still have a lot of healing to do before they can get back to business as usual. Record low interest rates will have stimulated demand for mortgage borrowing, but clearly the banks are unwilling or unable to lend. This won’t be the case forever.
British people have an exceptional amount of wealth stored in their homes (approx. £6trillion) and if they were able to release just a fraction of this equity it would create a lot of liquidity and help every part of the UK’s economy. Unfortunately right now Brits are repaying their mortgages at record rates, rather than releasing equity.
The UK government recognises the above and recently launched a “Funding for Lending” scheme aimed to help banks lend more where there is demand. It appears to be working and the total number of mortgages granted to home buyers was the highest since 2007 in recent months.
So I think British people can look forward to a sustainable recovery … just as soon as the deleveraging stops.