Brett Tudor asked:
It’s easy to look on the down side right now just ask Mervyn King.
“There is a feeling of chill in the economic air” remarked the Bank of England Governor in a press conference this month.
The air is likely to get distinctly chillier as we look ahead towards the autumn.
If inflation alone was the only problem in the economy, this could easily be rectified by simply raising the base rate a few basis points to keep the unpredictable menace in its box. But what happens when the lid is jammed open by something equally damaging like the credit crunch?
This is a continuing dilemma for the Bank of England and UK citizens anxious about jobs as well as rising fuel and energy costs. Ominously the tone of the inflation report paints a gloomy picture of more pain to come. Britain and most of the rest of the world are sailing into uncharted waters on the anniversary of the official start of the credit crunch - an unhappy milestone no one is celebrating.
Since last year we have become all too familiar with words like “sub-prime”, “house price crash” credit squeeze etc… to add to the return of the old 70s favourite - “stagflation”. The torrent of bad news has continued as newspaper headlines predict even more gloom to come in 2009 with a recession looming menacingly on the horizon. Yet the accepted wisdom is we are not technically in a recession until two consecutive quarters of negative growth- but it certainly feels like one.
Everywhere you look the system appears to be unraveling alarmingly, banks have continued to announce heavy losses - a record £700 million in the case of RBS. The UK property market is being held in the vice like grip of a negative feedback mechanism, held down by tight lending conditions on one side and a slowing economy held back by rising inflation on the other.
This week also revealed unemployment figures surging higher in July than at any time since 1993; worryingly around the time of the last recession. The official unemployment rate now stands at 5.4% and no matter where you look, all sectors of the economy appear to be being ****** down the plug hole of a deep recession.
A chill in the air there may be, but inflation has become too hot to handle for the Bank of England, who have no choice but to keep rates on hold at 5% seemingly indefinitely. The value of sterling has plummeted as a result, falling to a 2 year low of $1.90 this week.
All this of course means less money in our pockets, surging energy and food bills and the money we do manage to hold onto steadily being eroded away. With these factors in mind, it is no surprise there is less to spend on property. First time buyers initially thought to be the main beneficiaries of a falling property market have virtually been frozen out altogether by the huge deposits required by banks for mortgages.
Freezing stamp duty is unlikely to improve the situation either, why not wait and see house prices become even more affordable and mortgage deals improve?
The death of the 100% mortgage as a result of the sub-prime crisis also marked the start of an accelerating slump in the property market which has yet to reach rock bottom. The situation has been compounded by the governments’ dithering over suspending stamp duty, which has brought the ailing housing market to its knees this month.
So is there any good news to find amidst all of this?
Yes indeed there are if we look beyond the current turmoil. There are a few glimmers of hope to be found as the smoke clouding the future begins to clear.
Firstly we have seen a dramatic decline in the price of oil from its peak of $147 a barrel in July at the height of the tension in the Middle East triggered by Iran’s missile testing. Oil fell as low as $113 this month, a fall of 23% even though threats to global supplies have actually increased, notably this week with Georgia’s short-lived war with Russia.
Despite the Russia’s invasion of South Ossetia and the threat to Georgia’s oil pipelines, the oil price continued to decline providing a clear indication that it has already passed its peak. Even so the shock news came this week that UK inflation now stands at 4.4% with this month’s inflation report hinting that we are likely to see a further rise to more than 5% in the coming months - a figure that would push inflation above the base rate for the first time since 1981.
While less than ideal, the bank of England’s gloomy response is a predictably more an honest reaction to the situation we are in right now. Alastair Darling as he has done all year would at least play on some of the more optimistic signals emerging. For instance the inflation figure relates to July when oil surged to $147 a barrel, therefore inflationary pressure will almost certainly ease in August.
Further news from China this week painted an equally gloomy picture of China’s economy with Chinese government holding a meeting in July to discuss slowing growth, rising inflation and a serious decline in exports to the US and European markets. Demand for oil will almost certainly fall as a result, which will see prices fall even further in the coming months.
This will combine with a slowdown in the UK as the economy slowly grinds to a halt, this will unfortunately push unemployment even higher through 2009. While this will compound the misery for many, a slowing economy will eventually bring inflation back under control allowing the Bank of England to cut the base rate to stimulate growth long term.
There was even some more positive news arising from the housing market this month with the RICS monthly survey finding a small decrease in the number of its members reporting lower house prices - down from 86.9% to 83.9%.
A crumbs of comfort these developments maybe, but in these troubled times good news is hard to find.
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