Even before the recent problems in the financial markets, the UK economy looked to be heading into recession. Economic growth was 0% in the second quarter Now, the recession could be much deeper than previously anticipated.
Bad News on Economy
- Falling House prices reducing consumer confidence and consumer spending
- Problems of Bradford & Bingley and HBOS will lead to less mortgages on market and likelihood of further house price falls.
- Manufacturing output, and employment decreased at the fastest rate since the severe recession of 1982. Manufacturing output has now fallen for 5 consecutive months, and illustrates how the ‘real economy’ is being affected by the slowdown - not just stock markets.
- Burdgeoning National debt leaves the chancellor with little room for manoeuvre. Expansionary fiscal policy requires more government borrowing, but, this would be difficult.
- Rising Unemployment. After a decade of low unemployment, unemployment is now rising very quick. Rising unemployment will increase mortgage defaults and cause more problem for the beleaguered banking sector.
- Credit Crunch - More still to come. A recession and continued fall in house prices will only cause further problems for banks who have holes in their balance sheets. There will be further difficulties on the stock market and borrowing will become more difficult, reducing investment.
Good News
The ray of hope is that at least cost push inflation appears to be coming down, the producer price index dropped last month, indicating lower retail inflation in the future. With oil prices also coming down as well, it enables the MPC to be able to cut interest rates which will hopefully lessen the impact of the slowdown.
2 comments ↓
Its easy for every mortgage adviser to be miserable when everyone is miserable but lets look at the future by looking backwards first.
We have seen an unbelievable situation occur in the last year.
On one side we had interest rates under pressure to remain high because of inflation, on the other we have a falling housing market, plummeting spending on the high street, and a lack of spare capital.
Inflation was being caused by speculators on commodities.
Speculators bought up large positions in commodities such as oil, copper, wheat etc. As a consequence these goods quadrupled in price.
We then felt the result via increased inflation, but could do nothing about it.
I have pointed out that inflation would die when these speculators felt they were close to the top.
The reason for this is because many of them had bought their commodities on margin. This means they had borrowed up to £92 of every £100 they had invested in commodities.
If the price of commodities starts to fall, these deals will go pear shaped, and the loss would be exponential.
And so there would come a time that commodities would be dumped, and that would be when the market was close to its peak.
It has reached that in my view. As the commodity deals close, commodities like oil, wheat etc will collapse in price and as such inflation will fall off.
So much so, inflationary pressures could easily become deflationary problems.
As a consequence, a reasonably forwardly thinking, and well informed government might consider reducing interest rates as early as November to introduce capital into the system and free up spending.
This is essential. I am pretty confident this will happen within the year and into next year there will be further sharp falls.
There will continue to be further pain with the tail end of a recession but that will wash its way out over the next 18 months.
Now why else might I be so confident?
Well I may be cynical, but much noise exists from the government about how bad the situation currently is.
One might think they are not being helpful with that noise. One might also think they are actually bringing forward the inevitable. ‘Get the recession over with now and ready for an election’ might actually be a good plan. Cynical or not, consider it.
Now we all now that economical changes take a good 18 months to flow through the system.
Eighteen months from the expected date of the election (May 2010) is actually November 2008. Great work Sherlock!
Remember everyone was explaining that oil was driven by supply and demand and hurricanes (I seem to remember we have been having these for years, even as far back as the wizard of Oz).
i have said that investments in commodities in index traded strategies was at its highest in 2003 at $13b. In 2008 it reached $260b.
Much of this was bought on margin and when they are dumped expect the above to happen.
http://www.wwfp.net/mortgage/mortgage-broker.html
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