Deflation fears and what it would mean
The Eurozone is on the brink of sliding into deflation. This is after the economic disruption of the coronavirus pandemic dragged price growth in the bloc down to 0.1% in May. In fact, in 12 of 19 Eurozone countries, the rate had turned negative.
The fall in inflation has added to investors’ expectations the European Central Bank will inject more monetary stimulus into the economy next week. Economists worry a prolonged period of deflation would be painful for the Eurozone. This is because it would make high corporate and government debt levels even harder to manage as interest payments stay fixed, but wages, prices and tax payments all fall in cash terms.
Commentators believe steps must be taken to stop the marked fall in economic activity translating into a permanent reduction in expected inflation. Due to the high levels of debt in the eurozone, this could trigger a dangerous spiral between the fall in prices and demand.
With economic output set to remain below pre-virus levels for the next couple of years, the ECB will keep policy ultra-loose for the foreseeable future. The ECB has flooded the financial system with cheap money to stimulate activity and keep inflation from falling further below its target of just below 2%.
Meanwhile, Sweden revised up its first-quarter economic performance from its initial estimate of a slight contraction to growth of 0.1 per cent, as its no-lockdown approach to coronavirus helped prevent the deep recessions suffered by most other European countries.
HMRC scams on the rise
The number of scam emails from those impersonating tax officials has reportedly “skyrocketed” according to the Financial Times.
The report alleges the recent surge in tax scams has reportedly emerged from criminals seeking to “exploit financial fears over the coronavirus outbreak”. It comes as a recent freedom of information (FOI) request revealed the number of phishing emails reported to HMRC reached 42,575 in March. This represents a 74% rise since January when 24,446 phishing emails were reported.
According to the paper, the FOI request also revealed that Covid-19 was “explicitly referred to” in the phishing emails reported in March, as the UK went into lockdown. Phishing emails are those sent by criminals posing as a “trustworthy” authority, in efforts to convince people to hand over personal information such as email logins, passwords and banking details.
Commentators say many individuals who otherwise may not interact with the Revenue regularly, or do so through a tax adviser, may now have very pressing reasons to correspond with HMRC directly. This is a result of applying for the Self-Employed Income Support Scheme, or other government COVID relief programmes.
Hope for mortgage prisoners
The Coronavirus pandemic has had financial implications for almost everyone. For many, it has meant that their incomes have taken a hit, with millions of workers furloughed and effectively now employees of the Government. If you are self-employed, then you may not have been able to work at all.
The chaos caused by the pandemic stretches into our household bills too. There are currently around 140,000 mortgage prisoners in the UK. These are borrowers who are trapped on their current, expensive mortgage deal, unable to move to a cheaper loan.
Often, these borrowers took out their initial mortgage with a lender that is no longer operating in the UK. These include Northern Rock or Bradford & Bingley, lenders that hit the wall in the financial crash. Their loans were not just written off though. Instead the loan books were sold onto other financial firms who manage the loans but are not regulated to offer new deals. And unsurprisingly these firms crank up the interest rates, charging rates higher than you will typically see from active lenders.
The problem is that these borrowers are unable to switch to a new lender, generally because of stricter underwriting rules brought in by the regulators following the financial crash. These force lenders to be much tougher when assessing whether a loan is affordable or not. When it comes to mortgage prisoners, these tests simply go too far.
These borrowers are up to date with their payments. If they are paying out £1,000 a month to the hedge fund that bought their loan, of course, they could afford £700 a month with a cheaper deal. But if the strict tests are not passed, then they cannot move.
Thankfully, last October the FCA tweaked its rules to allow lenders to be a bit more flexible when assessing the affordability of mortgage prisoners. They were also given a deadline for contacting relevant borrowers who may be able to take advantage of these new assessments and therefore qualify for a new deal.
However, it wasn’t the most encouraging change. For example, the new, more moderate affordability tests are entirely voluntary. If a lender does not want to apply them, they do not have to. There is also the fact that only around one in 12 mortgage prisoners would be eligible for a new deal under these new rules. In other words, most prisoners are still stuck on their expensive deals.
Pandemic spurs digital revolution
While many aspects of life remain on hold, many organizations are charging full steam ahead on digital transformation efforts, even giving some pieces a speed boost.
As the pandemic stretches on and companies get used to their new “normal,” many are thinking about how their plans will evolve for the long term. What will start, stop, or continue after the crisis eases? With plenty of unknowns ahead, it might make sense to take a step back and reassess goals and timelines in some areas.
However, the speed at which IT has had to adapt during the pandemic, and the need for laser focus, provided exactly the boost many leaders needed to fast-track certain digital transformation objectives, experts say.
Both the dot-com bubble burst and 9/11 may seem like ancient history to some, but the lessons from that era are coming around again during this pandemic, say commentators. These events forced businesses to focus on what is really important: providing value to customers and investing in projects with a measurable impact on revenue and cash flow. The current situation will be no different.
Businesses will have to adapt to a new environment and adapt quickly. The ones who build change into their DNA will continue to succeed. In terms of wealth management, there were few plans in place for a lockdown combined with a stock market upheaval. But as we emerge from months of significant disruption, clients are seeing changes in how they work with some of their most important advisers that will make their relationships more efficient and flexible. This is most welcome for investors and advisers alike.