01 - 07 - 09

There seems to be a ‘hearts and minds’ debate going on in the government that could last until the next general election, which must be by May next year.

This revolves around government borrowing, which reached £19.9 billion last month, and spending. One cabinet faction, led by the Prime Minister, apparently wants to offer increased public spending, while the other wants to cut spending in order to match opposition plans.

Lower income higher outlay

The cabinet ‘rebellion’ was apparently led by Yvette Cooper, whose husband Ed Balls is still smarting from having failed to take over as Chancellor, when the PM was unable to sack the current incumbent in his recent reshuffle. But weighing in with a perhaps less ‘interested’ opinion Mervyn King, Governor of the Bank of England, has apparently told the Treasury select committee that the scale of the deficit is far too large and that ‘greater ambition’ is required to cut the national debt.

The problem is, of course, that the global economic downturn is slashing government revenue at a time when it is spending so much on aid for banks, paying benefits to the unemployed and so on. Allied to this is the threat that borrowing costs could suddenly soar if the rating agencies were to cut the UK’s credit rating from its current “Triple A” level; we are already on notice from one agency that this could happen.

Houses prices might start to increase from 2011

House prices
Few people would suggest that house prices are not still higher than many first-time-buyers can afford, although the shortfall is less than it was, for many. However, they are an important indicator of consumer confidence because when prices are on the increase, people feel better off – whether they are or not!

It is therefore potentially good news for the economy that The Royal Institute of Chartered Surveyors is reporting stronger demand for new and existing homes, with more enquiries and fewer homes on the books. This should eventually force up prices and while prices are still falling in many areas, the rate of decline should continue to slow. Some commentators expect house prices to stabilise by the end of the year and remain broadly level throughout 2010.

Some call this a saxophone shaped recovery

Economy
All talk now is of the timing and shape of the recovery, rather than whether it will come. The latest description is a saxophone shape, but many prefer the square root shape because this makes it clear that a relatively sharp recovery in Gross Domestic Product (GDP) is likely to be followed by a ‘flat line” while various parts of the economy return to normal.

What gives cause for concern is that with UK GDP believed to have shrunk by 0.9% in the three months to May 2009 – an improvement on the 1.5% reduction for the three months to April 2009 – government spending is set to reach 50% of GDP by next year, according to the Centre for Economics and Business Research Ltd (29th June). The figure is even higher in Northern Ireland and Wales. In 2007/8, government spending was just 41.1% of GDP.

The Organisation for Economic Co-operation and Development (source: www.oecd.org 24th June) also reports that the global economic slowdown has bottomed out although it is projecting a more difficult time in the UK and Eurozone than in the US.

Interest rates and inflation
Interest rates have remained stable during the last month, but the Bank of England has made it clear that, while too early to reverse the current stimulus, it is already preparing its exit from the twin strategies of historically low interest rates and quantitative easing (commonly [incorrectly] called printing money). When the time is right, both strategies will be dropped to avoid risk of rising inflation.

Few people imagine that we could experience Zimbabwe-style hyper-inflation – or the “wheelbarrow-currency” values of Weimar Germany. But it is important to note that even now, with the Retail Prices index down 1.07% year-on-year, the Consumer Prices Index (which excludes housing costs) is still running at an annual rate of 2.22%, which is above the Bank of England’s target. As soon as interest rates are increased, the RPI will rise again; and because this is likely to influence pay and pension settlements, it could indirectly push up CPI inflation closer to the level where Mervyn King has to write to the Chancellor again, for breaching the 3% level! The Bank of England will have to play a careful game.

No recovery is without its rocky moments

Markets (Data compiled by the Insurance Marketing Department Ltd.)
It is hardly surprising that, after three positive months for equity markets, several of the main indices weakened during June. The FTSE100 lost -3.82% during the month, while the FTSE250 was -2.08% lower. In the US, the Dow Jones also receded by -0.63% but the Nasdaq100 actually put on 3.42%, while the Japanese Nikkei225 added 2.71%. The Eurostoxx50 followed the UK indices with a loss of -2.02%.

Continuing its upward trend, sterling added a further 1.03% against the US dollar during June and 1.76% against the euro. After last May’s more significant rises, the slowdown is good news for exporters. If the pound strengthens too quickly, this can cause imports to become relatively cheaper and threaten domestic manufacturing markets.

House prices rose very slightly last month, but the annual figure is still some -9.56% down.

Jobs
One of the most interesting aspects of the current recession has been that, while there has been an unfortunately high level of job losses, many employers appear to have eschewed the ‘slash and burn’ job cuts of the 1990s, preferring instead to try to negotiate zero or near-zero pay awards as well as short-time working. According to Income Data Services (17th June), this has meant that unemployment is still below the levels of the 1990s, when the last recession began.

Inattention to detail could cost British jobs

It is unfortunate however that the government so far appears reluctant to make an administrative change that could save the loss of hundreds – perhaps thousands – of jobs in Britain’s sea ports. These have been hit by a retrospective change in business rates that threatens operators with massive charges for rates that they claim already to have paid to port authorities.

At a time when the firms concerned already face challenges associated with the global recession, this could lead some to abandon the UK altogether, costing many more jobs and further slowing the potential rate of recovery.
 
Business
The Bank of England’s Agents’ Report for June continues to show a disappointing level of willingness amongst banks to lend to businesses. They are apparently slow in processing applications, demanding higher interest rate ‘spreads’ and charging larger arrangement fees.

Turf wars help nobody – better to monitor the banks than fight

The British Bankers’ Association is telling regulators that they need to be careful not to impose too strict capital adequacy requirements on its members or they will be unable to operate profitably. It is to be hoped that they are not using their own reluctance to lend as ‘evidence’ to support this view. The Bank of England, Treasury and Financial Services Authority, to which banks report may be involved in internecine conflict over who has ultimate control over banks, but everyone should remember that we taxpayers own most of the banks and expect them to act in our interests, not their own.

On the positive side, the rate of de-stocking is slowing and domestic sales are falling more slowly as the contraction in consumer spending eases. Unfortunately, exports are not yet picking up.

Print