The Economy: Downturn or Meltdown?
July, 09, 2008
The Economy: I know, it’s terrible. Really, really bad. So bad, in fact, that I want to put my head under the duvet and wake up when it’s all over. Is a recession looming? What is a Bear Market (sounds cruel, doesn’t it)? How badly is the credit crunch affecting us? Will I ever be able to afford a trip to Waitrose again?
SaveBorrowSpend brings you a round-up on the state of the British economy.
House Builders
The knock-on effect of the credit crunch continues as the building industry announced 5,500 job losses in the past few days alone. As it axed more than a thousand jobs, house-builder Persimmon said it faced “the most challenging” period in its recent history. Rivals Barratt and Taylor Wimpey are also being hit hard, announcing 2,000 job losses. Redrow and Bovis Homes cut more than a thousand jobs between them, citing a dramatic downturn in business. These official announcements don’t even take into account the number of casual workers who’ve been laid off building sites in recent months. (What have they been doing with their gargantuan profits for the last ten years, I wonder?)
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Property & Mortgages
The bad news on mortgages and property prices is relentless. The latest figures show little hope of a revival in the months to come, with doom-laden reporting this week even suggesting it will take twenty years to recover (no, that wasn’t a typo).
The Council of Mortgage Lenders has reported that new lending was down 44% in May, year on year, not surprising as mortgage deals get ever more expensive. Moneyfacts says the average interest rate for a two-year fixed rate mortgage now stands at 7.07%. Ouch.
The reluctance or sheer inability to buy means that house sales are plummeting, even in the previously booming London market, where posh property group Savills reports a 45% drop in sales (that’s not a typo either). The lack of buyers means sellers are being forced to drop their asking prices to stand any chance of a sell. Property website Rightmove says sellers are currently outnumbering buyers by a massive 15 to 1. It would be good news for some people, but they can’t afford to buy.
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The Banks
What fate awaits the UK’s biggest buy-to-let mortgage lender and what will be the fall-out? Shares in Bradford & Bingley have collapsed amid fears of its future and two attempts to bail it out have already failed. It resembles Northern Rock in that whereby the Rock relied on too much risky lending as a business model, B&B has thrown its lot in with the buy-to-let market (which has, sadly, nose-dived). In a desperate attempt to avoid another Rock it looks like the big high street banks and pension funds could lose millions rescuing the bank. Another run on a British bank would signal an ever bigger crisis for UK PLC.
Retail
The retail sector was shaken last week when Marks & Spencer was forced to issue a profits warning. This isn’t just any profits warning: this is an M&S profits warning! Sharks are now slowly circling the retail giant, seeing a great opportunity to buy a quality company at a knockdown price. Not good news for M&S shareholders.
On the other hand, budget supermarkets are booming, as is Domino’s pizza (again – they did well out of the atrocious summer weather last year and are now benefitting as we stop eating out; which goes to show that wet people feeling skint love pizza, strange given the price of a Meateor). Look out for our SaveBorrowSpend guide to budget supermarkets for people who are too scared to go in one – we’ll be teaching you to love them and appreciate the virtues of the 30p jar of marmalade!
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A Bear Market
The FTSE 100 index entered a “Bear Market” earlier this week for the first time in five years with trading 20% lower than its June 2006 peak. The slide in share values was led by banks and property companies and traders are said to be braced for a sustained period of losses, adding to the sense of gloom and a general lack of economic confidence. A Bear Market is classified as a sharp slide in stock value over a prolonged period of time. Alternatively you may prefer the definition of a Bear Market as being when bears outnumber the bulls; bears being stock traders who believe stocks are going to fall and bulls those who believe markets are going up.
Consumer Confidence
Some analysts belief a country can actually talk itself into a recession, which is why the politicians try their best to avoid mentioning it. This is where consumer confidence becomes crucial: bad news splashed across the front pages and people struggling to pay their bills, leads to a lack of confidence and most crucially a decline in spending. Spending is vital to keeping the wheels of the economy well-oiled, which is why I bought three pairs of new shoes last month.
A recent poll by the Nationwide Building Society will make grim reading for the Government as it shows consumer confidence at its lowest recorded level. 50% of households think the economy will be in worse state in six months time.
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Unemployment
After years of falling unemployment, the total number of unemployed has risen by more than 20,000 since February this year. The number of people out of work and claiming benefit has climbed for its fourth consecutive month and renowned expert, Roger Bootle of Capital Economics, predicts an eventual rise of as much as one million. Job losses are being felt across every sector; from financial to construction, retail, leisure and media.
Borrowing
Mortgages may be difficult to come by, but consumer borrowing on credit cards, overdrafts and loans rocketed to £22.4 billion in the first quarter of 2008, a rise of £13 billion year on year, despite tightening of lending criteria. Research buy unbiased.co.uk (which promotes independent financial advisors) also reveals savings dropped by £11 billion in the same period. It seems that some people refuse to understand the cyclical nature of debt – you can’t keep servicing a debt by creating another indefinitely...
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Recession
Are we heading for a recession and when will we know? A survey published this week by the British Chamber of Commerce showed the UK to be facing a serious risk of recession as the credit crunch and rising costs was hitting the most important sectors of industry. The survey of almost 5,000 small, medium and large businesses revealed conditions in the service sector (now the largest part of our economy) are at their worst since the last recession in the early 1990s.
On the other had the Centre for Economics and Business Research is predicting a difficult two years for economic growth, but says recession will be narrowly avoided. Some economists believe the chances of a recession in the UK are now 50:50.
Recession is like the offside rule – oft discussed but seldom fully understood. So here’s the definition: “a period of negative economic growth for two consecutive quarters”. So, whatever the analysts predict we won’t really know we’re in a recession until it’s happened. By which time, it’s too late.
SaveBorrowSpend Philippa Adam
