For the last few months, bears have been coming out of their caves, they have rubbed the sleep formed by six years of hibernation from their eyes, and proclaimed woe in the US. Right now the feeling seems to be that there is a 50/50 chance of recession in the US, although this analysis seems optimistic to us. But what about Blighty? The UK has not had a recession since the early 1990s, in fact it’s been 61 quarters of positive growth now, comfortably the best performance ever. The UK managed to avoid recession earlier this decade when most of our economic rivals were in dire straits. Can it struggle on this time.
As a general rule of thumb the British economic cycle lags between 12 and 18 months behind the US cycle. So by that reckoning this time next year the UK could be suffering a fever of negativity.
Well, it seems to us that actually the negative sentiment in the UK right now is pretty bad, so if things are really going to follow the US and get a lot worse over the next year or so, then that’s bad news, indeed.
Indeed the last 24 hours alone have seen more doom and gloom than we recall seeing in the five years that Investment and Business News has been published.
The first piece of doom relates to the LIBOR market. The London Interbank Offered Rate is the rate published by the British Banking Association for measuring short-term interest rates on the money market. On Monday the LIBOR rate shot up, hitting 6.72 per cent, from just 6.09 per cent on Friday. That’s just a fraction short of a whole percentage point above the official bank rate, and it’s the highest level seen in 13 years. The three-month rate is up sharply too. In part, the rate is high because at the end of the year banks like to shore up their balance sheets but, even so, the highest level in 13 years seems pretty worrying.
The second piece of news relates to the High Street.
Clapham House Group, the restaurant chain which owns Gourmet Burger Kitchen, Real Greek and Tootsies, ScS Upholstery the furniture retailer, and Regent Inns, which owns Walkabout and Jongleurs bars, all warned that sales are on the slide.
ScS summed it all up petty well when it said, “When combined with the high-profile collapse in the subprime debt markets and the resultant credit squeeze, we believe that consumer confidence has been severely hit with regard to ‘big ticket’ purchases.”
But then, if all that wasn’t bad enough, Morgan Stanley put its claws into the melee. In fact it was two claws. The first claw tore a strip out of confidence in the stock market, when it warned that the FTSE 100 could fall by over 16 per cent over the next 12 months. It then ripped into the bullish property market pundits, warning that house prices could fall by 10 per cent next year, with the possibility of further falls in 2009.
We are sure you have noticed but headlines everywhere seem to be predicting falls in house prices now. Some are still dismissing this, but it does seem to us that it was over-zealousness that drove house prices too high in the first place. An irrational frenzy based on the belief that house prices only ever go up might well be turning into panic. That’s the way markets behave, and it always seemed incredulous to us that the housing market should be expected to behave differently.
And just in case you are in any doubt that there is bad news out there today, here is some more.
Well, actually, at first glance it is not that bad. The latest report from the Chartered Institute of Purchasing and Supply (CIPS) recorded a rise in its purchasing managers index. It moved from 52.8 to 54.4 Now anything above 50 is counted as positive growth in the sector and it has now been above 50 points for 28 months so that’s not bad at all. The blow, however, relates to growing fears that the manufacturing sector could exert inflationary pressures on the rest of the economy.
The CIPS index for measuring prices paid by manufacturers rose to 64.4. It’s been higher than that in recent months, but it’s still way too high. More to the point, the index for reflecting the prices charged by manufacturers also rose, hitting 57.5, the third-highest reading on record.
What with news released last week from the CBI that its index for measuring High Street prices is now at the highest level since 1998, the Bank of England has got a real dilemma on its hands. The calls for it to lower interest rates are rising to a cacophony. And yet, with good reason to think inflation is returning, it may feel that it just can’t raise rates.
The biggest single factor that could persuade it to lower rates lies with the money markets. If the Bank of England has calculated that the correct lending for rate stability is 5.75 per cent, and money markets are pushing rates a full percentage point above this, it could be argued that the rate of interest actually determined by the markets is too high, and that therefore the UK’s central bank should lower interest rates. It’s just that if money market rates then slide back down, the Bank of England will be left with egg on its face.
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