News
Economic review of November 2009
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Are we on the downswing or the follow through? |
According to the Bank of England Agents’ Summary (November 2009), consumer spending on goods is up compared with a year earlier and although that was a very weak period, the overall indicators are positive. New (but not used) car sales are up, which is largely a tribute to the recently boosted scrappage scheme.
While industrial de-stocking appears to be over, business investment is weak, with many firms apparently unwilling to expand while demand is uncertain. According to the Office for National Statistics, business investment was down 3% during the third quarter – some 21.7% lower than the same period in 2008. Allied to this is the perception that credit conditions, while slightly easier than in the spring, remain tighter than last year despite the Bank of England’s agents reporting of significant growth in bad debts. What appears to be preventing banks from foreclosing on commercial debt is the weakness of collateral security; perhaps this ‘silver lining’ will keep some businesses afloat.
More money in the economy should eventually help SMEs Shockwaves not as bad as feared
Unemployment
Reports that small businesses still find it difficult to secure loans to finance expansion plans are bad news for employment prospects. Matters should have been improved by the Bank of England having pumped £200 billion into the economy, but much of this appears to have disappeared into the banking system.
On the other hand, while this money may not have filtered through to the SME sector yet, large firms may be finding things easier and the banks are at least on the way towards being able to fulfil their tighter capital adequacy requirements. Easing should eventually filter through to the wider economy and lead to growth (but see inflation, below).
The Bank of England Agents’ Summary reports an upturn in employment intentions, but it is important to be aware that national insurance contributions are due to go up in April. Of course, we recognise the need for us all to pay more in order to help repay public borrowing, but this increased tax on employment might be coming at just the wrong time in the economic cycle. Anything that increases employment costs could cut job vacancies.
There had been fears that unemployment could reach 3 million before the end of this year. So far, the level has remained below 2.5 million but we must be realistic and recognise that the Organisation for Economic Cooperation and Development could be right in predicting that, even as the economy picks up, so could unemployment.
Markets (Data compiled by the Insurance Marketing Department Ltd.)
Despite the ‘glitch’ towards the end of November caused by the hiatus when Dubai World asked to have its loan repayments deferred all the major markets other than the Nikkei225 (which lost 2.35%) ended the month ahead.
In the case of the FTSE100, all October’s losses were recovered with growth of 2.9% although the mid-cap FTSE250 only managed to gain 0.37% and AIM just 0.77%. The Dow Jones, which had stood still during a weak October for most other markets, actually gained a massive 6.51% during November followed closely by its smaller sibling the Nasdaq100, which gained 4.86% - more than making up October’s shrinkage.
Sterling continued last month’s gains against the US dollar to end 0.25% higher, but lost its gains against the euro, closing -1.6% down (see below). House prices continued their slow recovery with the Nationwide index now 2.63% higher than a year ago. Unfortunately, oil continues its apparently inexorable rise, gaining a further 2.63% in November to end at US$77.18 per barrel for Brent crude 1-month futures. It now stands almost 70% higher than at the start of 2009. Gold has also surprised some commentators by continuing its upward drive, ending the month 12.98% higher at US$1,182.14 per troy ounce – it is now worth 46% more than a year ago.
Will the ‘pumping’ cause inflation?
Inflation and interest rates
According to the Times (9/11/09) even the Bank of England is unable to measure the impact of its quantitative easing programme. Apart from seeking to ease the banking crisis, with base rate at an historic low of 0.5% its Monetary Policy Committee has almost no other weapons to use in order to control inflation. Of course, the Retail Prices Index is currently still in negative territory at -0.78%, but the more important (to the Bank at least) Consumer Prices Index is now running at 1.55%; less than half a point off its target.
While economists tend to suggest that inflation normally falls after a recession, there is also concern that the injection of so much money into the economy could lead to inflation that will be difficult to control. The main issue is that it will not be easy for the bank to take money back out of circulation, because it never reached anyone other than the banks, which need it for capital adequacy. Its alternative - to increase interest rates – might not be possible in the current economic climate.
So unless we are very fortunate, we could well be faced with higher inflation soon. This will be detrimental to the interests of pensioners and others who tend to suffer more from inflation than younger people, because of the nature of their purchases. And if interest rates stay low, they will not even have the compensation of receiving more income from their currently under-performing savings accounts. This could be one reason why we learn that the Bank’s chief economist had argued against pumping more money into the economy at the November meeting.
Is it still raining in Tokyo? Still close to the top of its recent price history
Focus on Japan
Once upon a time, we had Japan held up to us as a paragon of industrial virtue. Then came the 1990s and the rise of the “Tiger economies”; Japan suddenly seemed to have lost its way and plunged into a long period of deflation.
One factor has remained constant within the country is its very high savings ratio – and the fact that 96% of Japanese bonds are held by its citizens, businesses and the Government itself. This means that the massive debt – some 170% of GDP – is not quite as frightening as it might otherwise be. Nevertheless, news that it is to float a staggering £950 billion worth of bonds next year raises a number of issues. Not least of these is whether it will be possible to service debt close to twice the national output.
Some economists suggest that the economy could implode, because it is not competitive with neighbours such as China (soon expected to overtake it as the world’s second largest economy). Others suggest the contrary view that its unique financial structure makes it more robust than other countries and that in terms of its ability to service debt, it is better off than the US, France, Germany and UK.
Sterling
Sterling started to fall against the US dollar in July 2008, losing more than 30% of its October 2007 value by February this year. Since then it has recovered by 14% but is still some 21% below its peak of two years earlier. The result of this is that inwards tourism is up according to the Bank of England Agents’ Summary and exporters are making encouraging sounds, despite the weakness of global demand. In other words, the UK has become more competitive.
In order to cash in on this, domestic manufacturing – the thing that made us so strong in the nineteenth century – needs to recover some of its vigour and start to cash in. Perhaps we have too long, as a nation, focused on services and forgotten our heritage of making things; now would be a good time to get back to basics and some additional tax incentives would be most welcome to get things moving again.
There has been some criticism of the ‘secret’ loan of £62 billion to Bank of Scotland and HBOS, a year ago, but while the Dubai Government appears to feel that no institution is too big to fail, allowing either of these banks to do so could have been disastrous for the UK economy and damaged sterling even more.
