Unemployment and hopes for a V shaped recession
December 30, 2008 | Leave a Comment
In recent months, the financial crisis has made job security for huge swathes of workers a thing of the past. In the months of June to August 2008 (inclusive) there was the biggest increase in unemployment since the middle of the last recession in 19991. It was also highly ominous that there was the biggest slide in the numbers of people in jobs since 1993.
Over this Christmas season we have seen further business closures. The cheapness of goods in the shops leading up to Christmas beg the question, will any more of the familiar retailers in the malls be going into liquidation in the New Year? Nearly 2 million people were unemployed in the U.K last week.
How far will the fingers of unemployment be reaching?
In the build up to Christmas, job losses in the financial, housing and service sectors have been the most obvious to happen. Alongside this it has become clear that economic hardship has taken its toll on the retail outlets as well as manufacturing. Even exporters, who were expected to benefit from the falling value of the pound, have not enjoyed the boost they hoped for as potential buyers abroad cut back on their own expenditure.
How do our unemployment levels compare with abroad?
U.K unemployment is still a lot lower than our competitors abroad with, for example, 5.7% compared to Germany’s 7.3% unemployment. With U.K workers being perceived as more flexible in recent years, this stands the U.K in good stead for recovery. The hope is that we will have a short sharp V shaped (rather than U shaped) recession and will come out of it quickly…. although predicting the outcome of this unique financial crisis is very tricky to do as we are all, globally, in uncharted territory.
The spectre of deflation on the horizon…what’s the problem with deflation?
December 18, 2008 | Leave a Comment
Deflation in context
Deflation. Its the lastest word being bandied about by politicians yet, only a couple of months ago, it was inflation that we were all worrying about (currently at 4.5% and still above its 2% target). So what does all this mean? If deflation means falling prices surely we should all be cheering and start shopping again?
Maybe. In the short term people may react in just that way to deflation. In the medium to long - term it should be making us nervous. I was noticing that twinge of concern the other day. I went into a store that I use regularly to but a top for my daughter. Whilst there were a lot of marked down goods, the one I chose had not been. Its price was just under $14. I go to the checkout and the assistant tells me that the price is now $4. How did I feel? Pleasantly surprised I mean everyone loves a good bargain don’t they? I double checked the price was correct and it was confirmed that everything was marked down to this extent. I then felt nervous. All shops mark down stuff….but to this extent of new stock?!!! Something felt wrong. How can stores survive with sustained mark -downs at this level?
So what is deflation and what does it mean for the economy?
In the short term, deflation (falling prices) is not a huge issue for the economy provided it does not last more than a few months. The UK economy has not seem a fall in the Retail Price Index (RPI) over a period of a year for over 40 years. No long term damage was done then…just a slowdown in the economy.
The Bank of England predicts that the Retail Price Index will fall below zero sometime in the coming year. This is a natural consequence of the drop in interest rates filtering through on the cost of mortgages and other borrowing.
However, the Consumer Prices Index (CPI) is expected to fall to around 1% some time next year (instead of the government target of 2% for inflation. The CPI falling below target levels is just as worrying for the Bank of England as being 2.5% above target. If deflation happens in the coming year, the Bank of England will become obliged to raise the interest rates so as to bring inflation back into line. If they don’t, retailers will be forced to lower their prices to such an extent that profit margins become too tight or, worse still, disappear. How can the economy start to grow again then?
Japan’s experience of deflation
In the early 1990s Japan was experiencing falling property prices and business failures. The government failed to intervene early. Failed business’ assest were being sold off in fire sales making an already weak economy even weaker. By the time Japan’s central bank started to to take action by cutting interest rates, increasing spending and reducing taxes it hardly had an impact. Japanese banks were taking all the failed loans off their balance sheets and owning up to haw much money had been lost but it was too much too late.
By the late 1990s deflation had set in for an already stagnant economy. People start holding out on buying goods for longer at times like this waiting for prices to fall. As they fall, profit margins are squeezed then eventually some businesses will be unable to sell their goods at a profitable price compared to more efiicient competitors and their business will fail. Resulting unemployment leads to less spending power in the community and this exacerbates the problem.
It took Japan a nearly 7 years to see positive inflation after that. Losing 10 years of potential economic growth is the last thing that the government wants to see. That is why tax cuts and major interest cuts have happened quickly in the UK.
Government to underwrite loans to businesses?
December 15, 2008 | Leave a Comment
David Cameron (Conservative leader in the U.K) has, again, commented on the problem of banks being unwilling to lend to businesses in the current economic climate. The problem is that the banks’ fingers have been so badly burned by the credit crunch and resulting financial crisis that they are scared stiff of being caught out again - especially when the full impact of all that has happened in the economy has yet to reveal itself.
Cameron argues that intervention is needed to kick-start the process of lending to businesses and that the only way to give the banks the confidence to do this is for the government to act as guarantors on appropriate business loans thereby taking away the risk from banks.
He has argued that a national loan guarantee was “a massive state intervention to help the banks lend again.” This seems like a great idea…however, with a government up to its neck in debt as a result of spending, taxation and bank bailout decisions, where is the money going to come from if called on for bad debts.
I am with Cameron when he called for “new rules and incentives to create a new culture of responsibility” which need to be enforced by the regulating body. However, it seems like a high risk plan (if recession is leading to the fall of many businesses) for a highly in debt government to act as guarantor to high risk loans.
I know that some risk taking has been necessary to intervene in the economic downturn - but surely it needs to be low risk?
Santa to blame for the credit crunch?
December 12, 2008 | Leave a Comment
Netmums.com surveyed 1,000 parents this year and found that around 40% are saying that Santa has had to tighten his belt too this year. Around 5% were planning to have a frank conversation with their kids and shattering the myth of Santa so that their kids don’t build false expectations.
However, nearly half of respondants claimed they would do whatever it took to ensure that their children still has a good Christmas and would deal with the consequences later. It is precisely this attitude that has caused hundreds of thousands of people to ratchet up inappropriate levels of debt in order to live out some form of ideal of being able to instantly buy the things they and their family want perceiving is as a need. “I need to get my child present X or Y (or even X and Y) for Christmas” is the refrain whilst putting the cost onto the plastic and facing the mounting debts later. Dare I suggest that the most valuable gift that we can give out children this Christmas is love, quality time and humble gifts teaching them the true value of the season as well as the importance of being financially responsible?
Central bank drops interest rates again. What does this mean?
December 9, 2008 | Leave a Comment
Central banks drop interest rates again.
The Central Banks dropped interest rates again (having only left a very short period since the last interest rate cut). What does this mean? Whilst we are used to occasional announcements saying the central bank has dropped / increased interest rates by X %, we are used to just thinking about it in terms of “Great! That changes my mortgage payments by $x or £y.” then forgetting about it.
So why should alarm bells be ringing when interest rates are cut this fast?
For a start, this is totally unprecedented and shows the extent to which the banks are scared stiff by the nightmare that they have caused. They are not passing on these interest rate cuts to the extent that was hoped which means they are covering their own backs first.
This global financial crisis that we find ourselves in has not even begun to reveal its full enourmity yet. On the front line in industry and retail we are hearing of long standing businesses that are leading brands going to the wall. A recent survey of recruitment consultants has revealed that the job market is heading downhill at a terrifying pace. U.S manufacturing is at a 26 year low. In Italy, industrial electricity consumption is down by almost one third. $70 trillion of cash has been injected into economies world wide and virtually disappeared into thin air!
Whilst interest rates being cut can have a positive impact by preventing this vicious circle from travelling deep into the economy, they are certainly not going to stop the process. It feels we are all on a rollercoaster ride and, like kids unable to determine the path of the ride and scared by the prospect, we are yelling “Stop the ride I want to get off!” But it can’t happen. The switch to start the ride was pulled by the banks that started selling dud mortgages. As we keep doing loop the loop past the same horrors revealed in different countries, even the engineers of this ride don’t know where it will end or how to stop it. We all have to just hold onto our hats and hope for the best. The world will seem quite a different place when we get off.
Credit crunch rise insurance claims
December 7, 2008 | Leave a Comment
Why would the credit crunch raise insurance claims?
It is feasible that, in the wake of the credit crunch and the start of a recession that insurance claims will rise. As people planned holidays then find they have either lost thier job or are nolonger able to pay for it using credit, there is potentially a rise in fraudulent travel insurance claims.
The Observer Newspaper recently quoted Direct Line Insurance and the Absolute Fraud Management (AFM) service as expecting a rash of claims from unscrupulous policy holders. Of course, this problem will not only be reflected in people trying to recoup what they have paid on failed holiday plans….a rise in household policy claims as a means for unscrupulous people to raise funds claiming loss of expensive items is also expected.
How will the rise in insurance claims affect customers?
Chris Price at Direct Line added: “It is generally said that during an economic downturn insurers see an increase of fraudulent claims on their books.” As a result, we can expect an increase in the time takes by insurers over legitimate claims as everybody’s insurance claims will be carefully scrutinised and authenticated. Customers seeming vague or nervy in during telephone claims will be expecting a face to face interview…otherwise premiums could end up going sky high to compensate for fraudulant claims.
For the rest of us this may simply mean that we have longer to wait for genuine claims to be settled. The current financial crisis also means that customers are more likely to claim for loss or damage to lower value items making the claims process slow down due to claims volume.
Automobile Industry Affected by Credit Crunch and recession
December 5, 2008 | Leave a Comment
Falling car sales leading to manufacturing cutbacks in the automobile industry
I suppose it stands to reason that as credit becomes less easily available, those big ticket items like new automobiles are going to be one of the first industries to suffer. The credit crunch and recession seem to be feeding off eachother now. In the U.S, the U.K and Australia there have been announcements about cut backs in automobile manufacturing. The result? Redundancies / shorter working hours, less income available to spend in the economy and retail outlets suffer further.
So what is the fallout of cutbacks in the automobile industry (amongst others)?
I don’t know about you but I have really noticed (when out and about) how grim peoples’ expressions are. There is a lot of pressure on most households’ income ….Thanksgiving, Christmas, school recess (an needing to entertain the kids)….all these factors are a pressure financially at the best of times….let alone when credit bills are hitting the doormat and there is uncertainty about how many more paycheks might be coming in if the recession bites hard.
So how do we move forwards from here? When can we feel safe to spend again? Public perception is that the VAT reduction in the U.K is not expected to have much impact on the spending of many households …the main benefit might be on heating bills (but any saving is quickly offset by rising household fuel costs). Banks are enjoying lower interest rates but passing only a fraction of them on to the customers. Everyone is scared.
Well, back to the Christmas preparations…this year it all seems much more balanced…a bit of giving but having the space to remember the reason for the season.
“Woollies” - that great high street institution - in receivership. I can’t believe it!
November 27, 2008 | 1 Comment
I don’t know about you, but I was shocked yesterday by the announcement that Woolworths was going into liquidation with an enormous £385 million of debts that have been prevented from getting any larger and have forced them to look at their options.
Everywhere I went this morning, people were talking about it. Generations have bought their pick and mix and bargain toys there as well as those weird and wonderful household items that you just didn’t seem to be able to find anywhere else. I salute you Woolworths for all that you have been over the years. You will be a sadly missed presence in our town centres!
As the news was announced last night, there were other casualties of the credit crunch fallout looking like they were heading the same way - MFI, Dolcis, Ethel Austin to name but a few AND THIS IS BEFORE CHRISTMAS!!!! If businesses that have weathered out many a recession are going to the wall now, where will it all end as the post Christmas slump in spending comes around.
I don’t know about you but I think the enormity of this global financial crisis is starting to sink in. Yes. I have been watching the news. I know about the extent of the financial crisis. It is the hidden depths of its impact that is starting to reveal itself….and, as I meet people in the North of England who have been laid off from different jobs more than once in the last few months, I don’t think I’m alone in wondering where it will all end.
Can the Credit crunch be reversed by central banks?
November 23, 2008 | Leave a Comment
The last few weeks have seen a whole lot of negotiation by governments with central banks in the hope that the huge cash injections that were eventually forthcoming would avert the worst effects of the credit crunch. Wold leaders have been discussing together how they can work together to save the world from the horror that the subprime crisis has revealed.
How can central banks reduce the impact of the credit crunch?
The federal government and their opposites across the world have been pumping more money into the financial markets in hope that this will allow funds to move more freely so easing the credit crunch. Basically, this allows more banks to borrow more money more cheaply. These lower borrowing rates will also be secured against lower value collateral.
Will the central banks be sucessful in reversing the credit crunch?
What these arguments for federal cash injections into the banking system are ignoring is that the money is being used to try to patch up the injuries to the system caused by bad lending decisions. It now seems unlikely that a major recession can be avoided. I also suspect that inter-bank and bank-customer trust has been so badly impaired that we will never quite go back to the “good old days” of freely available credit quickly supplied. Nor should we.
The economic backdrop in the U.S, the U.K and Europe is appalling and worsening too. Suddenly all the lenders are a bit skittish and yesterday’s good risks for lending are now not looking so good a risk…especially with possible redundancies around the corner as the recession deepens.
This means that, whilst there is already a lot of bad debt out there, there will be more bad debt looming as jobs get lost and spending is cut back. Even other banks will take a long time to look like a good credit risk as nobody seems to know what dark secrets lurk on eachother’s balance sheets. It will take at least a year before that kind of information becomes publically declared and so the decision to lend to other banks can be made based upon transparently declared facts.
Everyone is starting to hoard money ready for any surprises in their own financial affairs…consumers, banks and businesses. I wouldn’t hold your breath that these cash injections are going to be made available to customers too quickly. All the banks have had a major scare and need time to catch their breath, see the impact upon their own financial stability, work out what on earth happened and try not to do it again.
When will the credit crunch end?
November 19, 2008 | 1 Comment
What do we need to know when assessing when the credit crunch will end?
The credit crunch is essentially the constriction of available credit available in the global economy for institutions to lend to eachother as well as the public. A important part of how banks earn money is by lending to eachother as well as predicting exchange rate fluctuations and buying and selling currencies in order to profit from those fluctuations in currency value.
The way in which banks assess how much they trust eachother in the UK is measured through something called the Libor. Fluctuations in the Libor rate tell us how much banks trust eachother at the moment….as a result, this figure is a good way of assessing the extent of the credit crunch.
The Libor and swap rates between banks are used to work out how much they should be charging for new mortgages and loans. When everything is running smoothly in the financial markets, we would expect the 3 month Libor rate to average between 0.1% and 0.2% above the bank rate.
At the start of the credit crunch (August 2007) the Libor rate soared higher than this signalling problems ahead. By the summer of 2008 it was recovering a bit but the collapse of Lehman Brothers in September 2008 caused the Libor rate to spike again as financial markets panicked.
In the UK the $700 billion bailout of banks in the U.S had a negligable impact (it was more than 6% above the basic rate by then). It wasn’t until Gordon Brown arranged a similar cash injection into the UK banks of £40 billion has improved the Libor rate in the UK (modestly). The significant drop in interest rates has also made modest improvements as well.
So, when will the credit crunch end?
It is important to consider the knock-on effect of the recession, redundancies and cautious spending when answering “When will the credit crunch end?” All of these factors will have an impact upon how how long it takes banks to start trusting eachother as well as customers to be able to repay monies that they have borrowed. There are slow and cautious signs of banks re-building their trust in eachother following these major cash injections by U.S, U.K and European governments. However, the financial world nolonger feels like a safe place for most people and businesses as everyone seems to know of poeple who have been badly burned by the fallout of the credit crunch.
The credit crunch will end….but we may need to wait several years for the full fallout of the credit crunch to work out of the system and trust levels to be restored to where they were in 2007 before it all began.