Archive for February, 2009
Friday, February 27th, 2009
The price of a typical house fell by 1.8% in February which means that average house prices have fallen by 17.6% in the past year, according to the latest survey of house prices published by Nationwide yesterday. This represents a fall in the typical house price from £179,358 a year ago, to £147,746 now.
One would have thought that falling prices added to a sharp drop in interest rates over recent months would have kickstarted the housing market. There does seem to have been an increased interest shown by potential buyers but this has not filtered through into purchases. This is because mortgage lenders are now requiring a much larger deposit than they were a year ago, and also if public perception is of a continuing fall in house prices, then buyers would be acting logically to hold off until those prices fall further. In fact, Nationwide Chief Economist, Fionnuala Earley, says: “It is too early to say that the market has reached its trough, given the economic recession.”
And, up to five million homeowners could be in negative equity by the end of this year if house prices continue to fall, research published this morning has claimed. An estimated 3.8 million people either already owe more on their mortgage than their home is worth or are very close to doing so. A further 1.2 million homeowners are expected to be in negative equity by the end of the year if house prices drop by a further 10% to 20%, according to research group GfK NOP.
The group also claimed that around 14% of people who are already in negative equity may be in financial difficulties, as they have at least three other forms of debt, such as an overdraft, loan or credit card on which they repay the minimum balance each month. It also warned that the retirement plans of an estimated 7.2 million who were planning to use their home as part of their pension, were likely to be hit by falling house prices.
According to Andy Thwaites, director of insight at GfK Financial: “The shift to negative equity has the potential to be a mammoth welfare disaster for the nation, particularly when so much of the population has recently relied on the capital appreciation in their home to supplement their lifestyle, consolidate debts and fund retirement. The reality is that if there are further job cuts, the problem will become significantly worse.”
Tags: house prices, negative equity
Posted in Housing | No Comments »
Thursday, February 26th, 2009
This morning the Royal Bank of Scotland (RBS), which was bailed out by the taxpayer last year, announced a loss for 2008 of £24.1 billion. Even as I write this the Chairman of RBS is on the phone to the editor of Guinness World Records to claim their rightful place.
It seems that over the past year we have been bombarded by BIG NUMBERS. I don’t know about you but I have to admit that even as an economist they don’t mean that much to me. We learn to understand pounds when we are little kids. When we get to negotiate our wages at work we start to makes sense of tens of thousands of pounds (did I use a plural there?); and, if we are really lucky, we might even get a house that stretches into the hundreds of thousands of pounds. But what the heck are billions? How big a mattress would you need to get them under?
In the US they talk about trillions!!? But I read today that it would take a military jet flying at the speed of sound, reeling out a roll of dollar bills behind it, 14 years before it reeled out one trillion dollar bills.
There is a sensible point to all this. I believe that we have to be very careful not to become desensitised when we read about these colossal numbers. We can get to the point when we see another huge number and just shrug our shoulders. But as economists we need to be able to hold governments and other organisations to account. We need to understand what is happening and so we must try to engineer some sort of measuring device to be able to work out the implications of what is happening during this recession and what will be stored up for us in the aftermath. Don’t let them bamboozle us! (According to an online dictionary:”Bamboozle – conceal one’s true motives, especially by elaborately feigning good intentions so as to gain an end.”) Does that sound like a politician to you?
Anyway, back in what is claimed to be the real world RBS has said that it is going to put £325bn of so-called toxic assets into the government’s Asset Protection Scheme which offers insurance against future losses. Now you need to sit down for this one. To enter this scheme RBS will have to pay £6.5bn to the Treasury. But, in order for RBS to raise this money the Treasury will subscribe for £13bn of RBS ‘B’ shares. Believe me, you couldn’t make this stuff up.
And, according to the BBC, the former chief executive of RBS, Sir Fred Goodwin, who oversaw this whole debacle is now being rewarded at the age of 50 with a £650,000 annual pension. I’m sure the 20,000 RBS employees who, it is rumoured, are about to lose their jobs, will be very gratified to know that their loss will not be in vain.
Tags: Add new tag, Banking, Corporate losses, government bailout
Posted in Banking, Corporate losses | No Comments »
Wednesday, February 25th, 2009
Business investment in the final quarter of 2008 was 7.7% down on the same period of 2007, and 3.9% down on the previous quarter according to figures just published by the Office for National Statistics. Manufacturing investment actually fell by 11% from the previous quarter and 15.7% on a year earlier. Such high figures are sure to be reflected in a revision of GDP figures, of which investment is a major component, and many economists are expecting the ONS to show a revised fall in GDP in the last quarter of last year to 1.6% from 1.5% when figures are published later today.
The reasons for the fall in business investment are not particularly surprising given the state of the current recession. Demand for products is falling; cash is becoming tighter and the availability of credit tighter still; many companies now have spare capacity; and, fears about how long the recession will last is causing companies to move into survival mode and not to think about future expansion or innovation.
Changes in business investment over the past 30 years can be seen in the chart below produced by the ONS.
Total Business Investment percentage change, quarter on corresponding quarter of previous year
The largest fall in manufacturing investment was in vehicle production where a fall of 52.3% was seen between the third and fourth quarters of 2008. Nissan and other plants have already announced cutbacks in their workforce as a result of falling demand, and only last week BMW announced the loss of 850 jobs at their mini plant in Oxford.
It has been suggested that this cut in investment from its recent peak in the last quarter of 2007 represents a sharper fall than in any recession since records were first kept in the 1960s. But, although the decline in business investment has been fairly broad, covering a variety of sectors, the graphic above shows the ongoing volatility of investment. There were particularly sharp falls in the mid 80s and the early 90s and these sorts of cutbacks are not unexpected.
Tags: business investment, GDP
Posted in Investment | No Comments »
Tuesday, February 24th, 2009
Answer: Pawnbrokers. Yes, pawnbrokers with their traditional shop signs of three golden balls (or spheres as they prefer them to be called) are springing up across the country in our towns and cities – not that they ever went away in the first place of course.
Pawnbrokers were known in the Greek and Roman Empires and it is even claimed that they were operating 3,000 years ago in China. So what exactly does a pawnbroker do? According to wikipedia a pawnbroker is an individual or business that offers monetary loans in exchange for an item of value that is given to the pawnbroker. The word pawn is derived from the Latin pignus, for pledge, and the items having been pawned to the broker are themselves called pledges or pawns, or simply the collateral.
If an item is pawned for a loan, within a certain contractual period of time the pawner may purchase it back for the amount of the loan plus some agreed-upon amount for interest. The amount of time, and rate of interest, is governed by law or by the pawnbroker’s policies. If the loan is not paid (or extended, if applicable) within the time period, the pawned item will be offered for sale by the pawnbroker.
So, it is not surprising that during a time of recession when people are losing their jobs and finding it hard to make ends meet, that pawnbrokers will find their services all the more popular.
One such market-leading business is Albemarle & Bond Holdings Plc, which reported its interim six month figures yesterday. Albemarle & Bond have 114 branches across the country and at the end of December 2008 their pawn loan book stood at £27.0 million, which was 18% up on the same date in 2007. There was also a 19% rise in profit before tax to £6.2 million.
According to their Chairman, Charles Nicolson: “This was a good trading performance positioning the Company to deliver a strong result for the full year. Reduced activity from mainstream lenders and strong gold prices combined to make this another favourable environment.”
So, there you go. If you thought that banks cutting back on lending and prices rising were a sign of an economy in trouble there are actually companies that see this as a “favourable environment” and can make money from providing a much needed service to people in a difficult economic situation.
Tags: recession
Posted in recession | No Comments »
Monday, February 23rd, 2009
The number of homes repossessed in 2008 increased by 54% to 40,000 in figures just published by the Council of Mortgage Lenders. This level of repossessions accounted for 1 in 290 mortgages and the Council also reported that 1 in 53 mortgages are currently in arrears by three months or more.
This situation may be helped by the government’s mortgage rescue scheme which will help housing associations buy an equity share in a house or buy the whole house and rent it back to the current owners. Also, the Home-owner Mortgage Support Scheme, flagged by the government in early December, but still not yet in place, may also help. This is to aid homeowners made redundant during the recession by allowing them a payments holiday on interest only for up to two years. However, the interest will continue to be assessed and will add to the overall mortgage which will eventually have to be repaid.
But even with this frenzied government activity to put some sort of safety net into place, the Council of Mortgage Lenders is still forecasting a total of 75,000 repossessions in 2009.
Not surprisingly, the economic downturn coupled with the difficulties in obtaining mortgages has led to the lowest quarterly level of housing starts since these figures began in 1980. In details just published by the Department for Communities and Local Government, seasonally adjusted housing starts in England fell by 27% from 22,200 in the September quarter of 2008 to 16,300 in the December quarter. This means housing starts were 58% lower in the last quarter of 2008 compared with the same quarter of the previous year. At the same time housing completions also fell, registering 25% fewer between the December 08 quarter and the December 07 quarter. The detailed picture can be seen below.
Source: Department for Communities and Local Government
The only light on the horizon at the moment is from the Royal Institute of Chartered Surveyors. Although their members reported that house prices were still falling last month they also noted that the level of buyer interest is returning to the market. This is a result of the recent cuts in interest rate combined with the fall in prices and resulted in the level of new buyer enquiries rising for the third month in a row.
Have you signed up for our economics ezine yet? Sign up on our home page at www.economics.ac and receive the next ezine on Wednesday. This includes an interview with Peter Newton Lewis in Mumbai concerning the impact of the global recession on India, the world’s twelfth largest economy and a country that has been showing some of the world’s fastest growth.
Tags: house building, house repossessions
Posted in Housing | No Comments »
Friday, February 20th, 2009
We haven’t yet seen pictures of Gordon Brown sitting on the pavement outside 10 Downing Street next to a cardboard box bearing the sign – “Country to feed, please give generously” – but we are probably getting closer.
Yesterday’s public finance figures make grim reading and show that the government’s finances are deteriorating at an alarming rate. Historically, January is a very important month in terms of tax receipts, but January 2009 saw a drop in tax revenues of 11% on the same month last year, falling almost £7bn. So far in the first 10 months of this financial year, tax receipts are down by £10.1bn compared to the same period last year.
The reasons why this has happened are not surprising. Tax paid by companies fell by nearly 25% in January largely due to the losses being made in the financial sector which used to contribute about one-quarter of all corporation tax. Also, stamp duty was down by a half due to the meltdown in the housing market; VAT receipts fell by 11% compared to the year before as a result of the temporary cut from 17.5% to 15%; and income tax receipts fell by 3% due to increased unemployment and the loss of city bonuses.
As tax receipts fall, government borrowing has to rise. According to Gemma Tetlow at the Institute for Fiscal Studies: “…on current trends the Government is on course to have to borrow £87bn in 2008-2009, around £9bn more than the Treasury expected in November’s Pre-Budget Report. As a share of national income, this would be the highest level of public sector net borrowing for 14 years.”
But the situation is set to get even worse. Andrew Goodwin, Senior Economic Advisor to the Ernst & Young ITEM Club pointed out that government spending will increase quickly over the coming months as unemployment rises at the same time as the worsening recession reduces tax revenues further. He said: “ITEM expects Public Sector Net Borrowing to rise above £130bn in 2009-10.” The Financial Times in a Leader published today claims: “Net borrowing in 2009-10 may break £150bn; more than 10 per cent of gross domestic product.”
Perhaps the only good news at the moment is that there does not seem to be any problem with the markets funding this level of government borrowing. Investors are so scared of losing their money in the private sector that for the time being at least, they seem happy to lend to the government by buying government securities.
Tags: government revenues, Public Finances, public sector net borrowing, taxation
Posted in Public Finances | No Comments »
Thursday, February 19th, 2009
The minutes of the Monetary Policy Committee of the Bank of England were published yesterday, covering their meeting on 4th and 5th of February at which they voted to reduce the Bank Rate by 50 basis points to 1.0%.
The minutes provide a fairly grim summary of the ongoing crisis in the world economy with talk of a “worsening outlook” and prospects for growth and inflation being “unusually uncertain”. The Committee noted the weak growth in nominal spending and the marked slowdown in the growth of M4 (the broad measure of money or sometimes referred to as just “the money supply”) and said that: “The growth of money, credit and nominal spending would be key early indicators for judging the effectiveness of monetary policy.”
The Bank made it quite clear that they could not, and would not, intervene to prevent the long-term adjustment that the economy was going through, but it was their job to restore nominal spending growth to a level that would be consistent with returning inflation to its 2% target. This was particularly important as they judged that inflation would fall “well below” the 2% target in the medium term.
How were they going to achieve this? They concluded that the inflation target could not be met solely by cutting Bank Rate. Given that rates are now so low there is not much room to manoeuvre in future. This is because banks and building societies need to keep a margin between the rates they offer depositors and the rates they lend at. The difference between the two broadly provides their profit. However, with savings rates already at historically low levels a further reduction in base rates would not allow savings rates to be reduced much further and thus lending rates would probably be maintained at existing levels in order to keep up margins and hence profitability. Thus further cuts in Bank Rate may have little effect.
The Bank of England therefore needs another monetary weapon. In the words of the MPC they would need to use “alternative policy instruments”. What this amounts to is so-called “quantitative easing” or to the man in the street “printing money”. The Bank is now looking to increase the supply of money into the economy by making additional purchases of government securities and by buying private sector assets such as commercial paper and corporate bonds. The Bank believes that these measures would help to stimulate the economy further by improving liquidity and thus encouraging the flow of credit to companies.
With this in mind, the Committee agreed unanimously that the Governor should write to the Chancellor to ask permission to buy government and other securities which would be financed by the creation of central bank money.
Please Sir, may we print more money?
Tags: Bank of England, Bank Rate, MPC, printing money, quantitative easing
Posted in Bank of England, Monetary Policy Committee | No Comments »
Wednesday, February 18th, 2009
At noon today the OECD published new figures to show that GDP in the OECD area fell by a record 1.5% in the final quarter of 2008. This was the largest fall since OECD records began in 1960.
Figures show that GDP was down by 1.0% in the US; 3.3% in Japan; and the euro area by 1.5%.
For full details go to: http://www.oecd.org/dataoecd/54/32/42200999.pdf
Tags: GDP, OECD
Posted in GDP | No Comments »
Wednesday, February 18th, 2009
Latest inflation statistics issued yesterday show that the Consumer Prices Index (CPI) fell to 3.0 per cent in January compared with 3.1 per cent in December. This showed that prices were more robust than consensus forecasts of 2.7 per cent had suggested.
According to the Office of National Statistics (ONS) this was partly due to the fact that the high street had already slashed prices in December so that the normal effect of the “January sales” did not come through. All in all, there was downward pressure on the CPI from falling transport costs, rents and energy costs but these were more than offset by rises in the price of toys and games, newspapers, books, stationery and holidays abroad. There has been a major impact on import prices from the decline in the value of sterling as the sterling cost of non-oil goods imports rose by 14 per cent in the year to December.
The other major measure of inflation, the Retail Prices Index (RPI) actually slowed to 0.1 per cent in January, down from 0.9 per cent in December. This fall was mainly due to the fall in mortgage interest payments and house depreciation, which are not measured in the CPI. Even this was something of a surprise as many thought the RPI would have moved into deflationary territory. The recent picture can be seen below.
Source: ONS
The CPI figure is still above the Bank of England’s target rate of 2.0 per cent but the Bank believes that CPI will fall below target in the coming months and remain there for up to two years. George Buckley, Chief UK Economist at Deutsche Bank, believes that CPI will fall below 1 per cent by the summer.
Whilst lower inflation is considered a “good thing” reflecting a falling rate of price increases, deflation is considered a “bad thing” as it would mean that prices are actually falling. With RPI at a 49-year low and about to become negative and CPI forecast to fall sharply the prospect of deflation is now being taken seriously. The problem with deflation is that it kicks off the start of a vicious cycle. As prices start to drop consistently it makes sense for consumer to postpone spending and wait for them to drop further. This means that shops will do less business, and in turn will cut their orders from suppliers, which in turn will see cuts in employment. People who lose their jobs will have less to spend and the cycle becomes intensified.
This is what happened in the Great Depression in 1930s America and the world’s economies are struggling to take counter measures. Central banks are slashing interest rates and injecting money into economies at a rate which may well ward off a depression. On the other hand, such actions may be stoking up an inflationary cycle for when the global economy starts to recover.
Tags: CPI, Deflation, Inflation, RPI
Posted in Deflation, Inflation | No Comments »
Tuesday, February 17th, 2009
The Japanese name for Japan is Nippon which is usually translated as “The land of the rising sun.” But at the moment the Japanese government and central bank are probably joining in Elton John’s hit from 1974: “Don’t let the sun go down on me.”
The reason for this is that it has just been announced that Japan’s GDP fell by 3.3% in the final quarter of 2008 which is the biggest drop since 1974. When calibrated to an annual rate the economy was contracting by 12.7%. Kaoru Yosano, Japan’s Economic Minister, said: “This is the worst economic crisis in the post-war era. There is no doubt about it.”
Why is Japan performing so badly at the moment? It is mainly because Japan is so dependent on the sale of its manufactured goods at a time when the bottom has dropped out of the world market. In fact, three percentage points of the 3.3% fall in GDP was due to a fall in net exports. Consumers are currently cutting back on their demand for cars and expensive electronic goods around the world. Although Japanese manufacturers have responded more swiftly than in previous recessions by cutting temporary workers and reducing production they probably have not acted quickly enough.
Normally, companies’ inventories fall during a recession as companies cut back on production and use up their existing stocks. But in the last quarter of 2008 inventories actually rose slightly. Whilst this helped slightly to offset the fall in GDP it shows that output was not being cut aggressively enough and that it will be cut even further to reduce inventories. Forecasters are expecting a similar contraction of around 3% in the current quarter.
Of course, eventually inventories will be run down to virtually nothing and then output will start to go back up as firms restock. But with cutbacks in investment and domestic consumption it will be some time before this comes through into GDP figures. One ongoing problem is the strength of the yen. Whilst sterling has plummeted over the past year, the yen has increased by more than 20% against the dollar. This makes it even more difficult for Japanese companies to export abroad.
Why is the yen not falling? According to Lex in the Financial Times (Tuesday 17th February 2009) the private sector in Japan holds over $1,700bn in net foreign assets. Some of these have been sold in recent months and as individuals as well as companies seek to repatriate assets held abroad this will help keep up the yen’s value.
The outlook is bleak. The government is finding it difficult to get a stimulus package through parliament; the independent Bank of Japan is merely trying to stabilise markets rather than aggressively intervening; and, existing general government gross financial liabilities as a percentage of nominal GDP were already standing at 173% in 2008. This is the largest percentage of any OECD country and compares with 58.7% in the UK and 73.2% in the US.
Altogether this means that Japan is in a very perilous position and some commentators are even mentioning the “D” word – depression. It has already hit former finance minister Shoichi Nakagawa who resigned today after appearing “tired and emotional” at last week’s G7 meeting due to imbibing too many “cold remedies”.
Posted in International, News | No Comments »
|
