Finance Explained

Labour now have the big majority the polls predicted and as ever a change in government provokes both caution and hope among the investment community as it considers how it might be impacted by a change in government policy. It is early days for the new government but we do have the pledges in Labour's manifesto to review to understand their approach to financial services. Let's run through them.  Pledge 1.  "Deliver inclusive growth of the UK’s financial services sector by scalling regional financial centres alongside established hubs in London and Edinburgh and unlocking the full potential of the mutuals sector." If we ignore the spelling mistake, this is similar in principle to what the Conservatives called 'levelling up' and may provide local opportunities for growth.  Pledge 2.   "Enhance the international competitiveness of the UK’s financial services sector by pursuing a more joined up and innovation-centred approach to regulation and supervision, ...

So, Labour have returned to power in the July 2024 UK election with a huge majority, if not a corresponding share of the popular vote thanks to the quirks of the first past the post system in the UK. Naturally this change in government leads to concerns among investors as to how their investments will fare within the UK, notwithstanding the wider global context of instability with the US election later in the year and ongoing troubles in Ukraine and the Middle East.  Throughout the campaign Kier Starmer has stressed his desire for growth and to try to reassure voters that the economy is in safe hands with Labour. Encouraging sounds in principle. So, how should you react? Despite Brexit the UK economy is still very much subject to the wider changes in the world and the markets have known for a long time that a Labour majority was highly likely so will have factored that change in already. Also on the cards are signs of a closer approach to the EU, albeit one short of rejoining the C...

Gilt-edged securities, also known as gilts, are debt securities issued by the government of the United Kingdom.   They are called gilt-edged securities because they are considered to be among the highest quality and most secure investments available, with a long history of low default rates and stable returns. Gilts are issued in a range of maturities, from short-term bills with a maturity of less than one year, to long-term bonds with a maturity of over 25 years. They pay a fixed rate of interest, known as the coupon, which is paid to investors on a regular basis, typically semi-annually. The principal amount of the gilt is repaid to the investor at the end of the term of the gilt. Gilts are issued by the UK Debt Management Office (DMO), which is an agency of the UK government responsible for managing the government's debt. The DMO issues gilts on behalf of the government to finance its borrowing requirements, and sets the terms and conditions of the gilts, including the coupon ra...

Gross domestic product, or GDP, is a measure of the total value of all goods and services produced within a country in a given period of time, typically a year. There are three approaches to measuring GDP: the expenditure approach, the production approach, and the income approach. Expenditure approach The expenditure approach to measuring GDP, denoted as GDP(E), measures the total value of all final goods and services produced within a country, based on the amount of money spent on these goods and services. Final goods and services are those that are consumed by the end user, rather than being used as inputs in the production of other goods and services. The expenditure approach to GDP includes four components: Personal consumption expenditures: This is the total value of all goods and services consumed by households, including durable goods (such as cars and appliances), nondurable goods (such as food and clothing), and services (such as healthcare and education). Gross private domest...

Frictional unemployment refers to the unemployment that results from the normal functioning of the labor market.   It arises from the fact that it takes time for workers to search for and find new jobs, and for employers to search for and find suitable employees. Frictional unemployment is a natural and inevitable part of the labor market, and is not necessarily a sign of an unhealthy economy. There are several factors that contribute to frictional unemployment: Job search: When workers are looking for new jobs, they may temporarily be out of work while they search for suitable employment opportunities. This is known as job search unemployment. Resignation and retirement: When workers leave their current jobs in order to retire or to pursue other opportunities, they may be temporarily out of work while they transition to their new roles. Geographical mobility: When workers move to new areas in search of employment, they may experience temporary unemployment while they look for jobs...

Financial intermediation services indirectly measured, or FISIM, refers to the value of the services provided by financial intermediaries, such as banks and other financial institutions, in facilitating transactions between borrowers and lenders.  FISIM is typically calculated as the difference between the interest rates paid by borrowers and the interest rates received by lenders, minus the costs incurred by the financial intermediaries in providing these services. FISIM is an important concept in national accounts and macroeconomic analysis, as it helps to capture the economic value of the services provided by the financial sector. It is typically included in the measurement of gross domestic product (GDP) and other macroeconomic indicators, as it reflects the contribution of the financial sector to economic activity. There are several ways in which financial intermediaries provide value to the economy through their intermediation services. These include: Information gathering an...