Published on the Business Today, issue Wednesday, 23 December 2009
In the US and Europe, the tradable goods sector of the economy faces a cold shower as growth slows. We may not be heading for a depression anymore but a recovery is weak and may even turn out to be a double dip one. In the US, signs of sluggish growth and low inflation in the economy has discouraged market investors and recently increased the likelihood that the Federal Reserve might cut interest rates again. Definitely in the UK, where most of our tourists originate they seem to believe the recovery has barely started. They face a daunting 50 per cent income tax top rate next year. Locally, worries about the slowing economy and slashed profit margins have been appearing all through the year especially after a series of cautious trading statements from leading export and tourism based companies. The PN in power cheer us with the notion that the worst is over and that grass shoots leading to a recovery are appearing in the landscape.
So it is a feeling of déjà vu to hear local politicians harkening us to be courageous since the worst is behind us. They counsel that Christmas is a time to rejoice and forget about recessions and its woes. Party apologists remind us that we have fared much better than other recession ridden countries such as Greece, Ireland and Spain where unemployment is reaching alarming rates of 20 per cent. Yet the party faithful are acting cautiously possibly due to the recent additional hike in energy prices announced to start on the new year. Certainly most will take head not to spend until they drop as suggested by glossy adverts on magazines ,newspapers and T.V commercials. The days of unbridled spending is past and shops lament that customers are risk averse and take their time to buy even basic items let alone expensive time pieces that are advertised on dailies with prices starting at a euro 11,000 price tag. Paradoxically, optimists hark us to live for the moment and try to forget the lamentations of the year which is soon to pass. For them Christmas comes only once a year and hedonists cannot be bothered to worry about the future. The beauty of it is that both versions manages to match both the optimists’ green shoots and the pessimists’ gloomy warnings that a sort of recovery is inevitable given the massive rescue funds invested last year by USA, China and E.U.
The unprecedented bank bailouts in US and Europe cannot but start to reap positive results in other words the patient has been administered the best medical care and sooner or later he or she will be yearning to jump out of the sick bay. Quoting George Buckley, chief UK economist at Deutsche Bank, he suggested the economy will grow again early next year. Both American and European Central banks have slashed their interest rates. This year the dollar has been showing higher volatility against major currencies and this is reflected in oil prices which seem to have normalised around the $70 to $ 80 mark. Back to the present topic and the Christmas festivities which often heaps increased pressure on family finances. This can be made worse because people give in to temptation and run up credit card, loan, or overdraft debts. Really and truly, credit cards can be very advantageous to the smart consumer who uses them wisely. But if you are not mindful of the terms of credit cards, there can be hidden addiction of credit cards. Greed often takes over. Ask yourself the question….can you afford the minimum repayments? If you do not make extra cash by working overtime or generating new income then you end up not paying off your principal balance. By comparison you will be acting like the Malta government who issues new bonds to repay the old maturing issues but regularly pays the current interest. Naturally until the national budget turns into a surplus there is no money to pay back the bondholders. (with hindsight there has not been a surplus in the past 20 years ) Typically banks target students who are often bombarded by credit card offers. Many get two or three offers a week through the campus office. During most class days, credit card company representatives are in designated campus locations soliciting students to fill out applications in return for a free gift.
Students routinely sign up for credit cards they have no intention of using simply to get the free merchandise. My advice to students is to seriously consider the fine print before signing up for a card. Please find out what the grace period is and review all small print especially transaction fees. Do not forget to look for special delinquency rates, which can be very high. It is a must to read the fine print and, remember, credit card operators make heaps of money under the assumption that you won’t pay your statement in full and on time every month. So, do shop around and compare offers from competing banks. Once you sign up do be careful of fraud when someone gains access to your credit card information and makes fraudulent purchases. As a student you need to watch your statements regularly to make sure that someone else has not stolen your credit card. In Europe banks aggressively market their credit cards by offering bargains during the Christmas / New Year holidays offering zero or one per cent deals, tempting people to run up credit card debts. There’s certainly nothing wrong with making the most of these zero per cent deals on offer, but the most important thing is to earn extra income to repay the debts you run up on a credit card.
All this can be attributed to the stressful effect of Christmas which finds us trying to fritter away our annual savings over a last minute spending spree. A word of advice …if you think, come the end of the month, you’ll be struggling to repay all your credit card statements or overdraft debt then today act promptly to remedy the looming debt crisis. If you heed this advice then you need not bury your head in the sand . Just by acting sensibly you will gradually reduce your debt exposure. If greed takes over and you are carried away as most do in the last minute shopping frenzy then the credit card company will remind you next month that your obligations will not disappear. Definitely your annual bonus will not stretch that far. Taking the cue from others you will find yourself sinking more in debt and applying for a short term loan or overdraft to clear your credit card totals. Next January, your credit card balances are rising while your income is decreasing due to higher energy bills and other living expenses.
There is one way how to find out if you are in a fix and need professional help. Just ask yourself if you are only paying the minimum amounts required on your accounts, or maybe even less than the minimum while the principal balance remains unpaid. A more serious sign that shows how much you are in a tight spot is if you apply to another bank for a second or third credit card in order to use cash advances from it to pay an existing card. Are you hiding the true amount of your indebtness from your partner/spouse because you just lost your job or fearful that you are going to lose it soon. So in conclusion, during the Christmas holidays make double sure that you use your credit judiciously. A merry debt free Christmas to all readers.
George Mangion Partner: PKF Malta . Certified Public Accountants & Auditors Members of PKF International - World-wide Group of Accounting Firms