| Rates | Close | Change | Rates | Close | Change |
|---|---|---|---|---|---|
| Oil | 106.23 | 106.23 | Oil | 0.0 | 0.0 |
| Gold | 802.8 | 1.90 | Gold | 0.0 | 0.0 |
| $ to £ | 1.7662 | 0.00 | $ to £ | 0.0 | 0.0 |
| € to £ | 1.238 | 0.00 | € to £ | 0.0 | 0.0 |
| $ to € | 1.4267 | 0.00 | $ to € | 0.0 | 0.0 |
oil
ftse
| Index | Close | Change |
|---|---|---|
| FTSE 100 | 4,122.86 | 57.37 |
| Dow | 8,419.09 | 270.00 |
| NASDAQ | 1,449.80 | 51.73 |
| Nilkkei | 7,863.69 | -533.33 |
| Hang Seng | 13,405.85 | -702.99 |
| CSI 300 | 1,868.63 | 4.43 |
| Sensex 300 | 8,739.24 | -100.63 |
| DAX | 4,531.79 | 137.00 |
US finds the economic gas, and reaches for the end of crisis
Did you hear that? Was that the sound of the fat lady singing? Is it over? Has the great economic crisis of the late noughties turned out to be nothing more than the mild blip of 2008? Yesterday saw the release of revised official data on US economic growth. And the data says the US expanded at an annualised rate of 3.3 per cent in the second quarter. This compares with the original estimate of 1.9 per cent expansion. And the markets loved it; the Dow soared 212 points and at close of play yesterday stood 500 points up on the August low. To put these latest figures in perspective, anything between 2.5 and 3.5 per cent is considered to be on par with the historical trend – so actually it appears that the second quarter saw growth at the upper end of what is considered to be sustainable.
So the bulls come out to play, and the optimists look smug and say “told you” everything was fine really, but maybe the real lesson from this announcement and the way it was so warmly received is that the markets still haven’t got it. Their heads remained buried in the sand, oblivious to the deeper forces at work.
There were two reasons for the startling US performance. Firstly, US exports soared during the period. The data suggests exports shot up 13.2 per cent, while imports fell by 7.6 per cent. Put that together, and the number crunchers say external demand added 3.1 per cent to GDP, accounting for all but just 0.2 percentage points of the expansion.
This is how it is supposed to be. The big hope for the US has long been that she can export her way out of trouble. But, as has been argued here before, it is quite naive to assume that the world’s largest economy can change from a net importer to a net exporter without there being a massive hit on the rest of the economy.
But it takes time for this hit to be felt. Already the Eurozone has paid the price for US growth, by seeing its economy contract in the second quarter. Don’t expect demand from the Eurozone and the UK for US goods to be so great in the next quarter. Don’t expect Japan, China and the rest of Asia to keep buying goods ‘made in the USA.’ If they do this for any significant time period, their own economies will slow dramatically. It really is debatable whether the world can afford to see Uncle Sam become its big supplier instead of big customer.
It seems that the changing dynamics in the US will hit the global economy, which in turn will hit the US.
And we have already seen the early stages of this occur on the currency markets. Currency traders have already grasped the point that the account between the US and Europe had swung too far in one direction – that is why the dollar has risen so rapidly in recent weeks. Inevitably, this will hit US exports hard in the next quarter.
The second reason to believe the figures for the second quarter may not be all they are cracked up to be is simply this. Uncle Sam handed out a massive tax credit during the quarter. And as CNN Money quoted David Wyss, chief economist with Standard & Poor’s as saying: “Mostly what this report will say is, when you give somebody an $1,800 check, he spends it.”
The facts are simply these: US house prices are still falling. The massive inventory levels of unsold properties mean this will continue for some time. US consumers are in too much debt. US banks continue to make massive losses.
In a way it may have been better if US consumers had saved the tax rebate, or used it to pay off some of their debts – it may not have helped the Q2 figures, but at least it would have seen the US in better shape for a final, sustainable recovery.
And that brings us around to the real concern. Markets still have not got their heads around the deeper problems afflicting the US; US consumers, it appears, have still not learned the lesson of thrift. Until these things happen, the real US recovery can not begin. Reality may not be pleasant, but until it is faced, the real fix can not be found.
Wishful thinking, weights on shoulders, and heads in sand
Spare a thought for poor old David (Danny) Blanchflower, arch dove at the Bank of England Monetary Policy Committee. “I feel a weight on my shoulders,” he said when talking to Reuters, yesterday. Poor old Danny Boy, he reckons he has failed to convince the rest of his interest rate-setting chums how serious things are and is rather taking it all personally, as if somehow the economic crisis is all his fault.
And while you are in the mood for being sympathetic, spare a thought for Britain’s retailers. They would rather forget the summer just gone, said the CBI yesterday. The employers’ organization released its latest survey on the state of the High Street on Thursday, and boy, it was really awful.
But then again, maybe it is the Office for National Statistics who should be getting our sympathy. It is receiving no end of flak. Recently the ONS reported another set of healthy figures for the High Street. “This can not be,” said our retailers and those who apply common sense to their economic reckoning. The CBI report just gave these critics of the ONS even more ammunition.
Come to think of it, maybe the ONS doesn’t deserve our sympathy after all. Don’t forget, its data has been used by the optimists to help them avoid the vision of reality.
Mr Blanchflower is worried. “I feel that things I have been fearful about have come to pass and I have actually been pretty accurate in what’s coming and I have failed to convince the others of what is appropriate.
“People need to understand that sometimes you will have to focus on the timing of issues. I think people have become complacent and they have not understood what would happen if an economy starts to slow fast, if firms start to close. What we have now is a turning point in many ways – certainly you might think of it as a paradigm shift. We have a global financial crisis, an oil shock coming [and] people with little experience of what is really going on.”
He added: “People have to start to respond to the fact that we are in a recession and the danger is we’ll be in a very serious and long-lasting recession unless we do something. This is a call to action.” And then came the killer punch. You may recall the Bank of England recently predicted GDP will be flat next year. Well, Mr Blanchflower said this prediction has “a great deal of wishful thinking attached to it.”
In other words, Mr Blanchflower is expressing the same sentiments as the article above on the US economy. Until policy-makers see things for what they are, the solution will not be found.
Meanwhile, the latest CBI report on the High Street came out yesterday. The CBI headline index, which is produced by asking retailers whether sales are up or down on the same period a year ago, and taking the percentage balance, fell to minus 46. That is the lowest reading ever recorded by the CBI and its records go back to 1983 – although it did add that changes to the survey mean the 25-year comparison is not entirely accurate.
Andy Clarke, Chairman of the CBI Distributive Trades Panel, and Retail Director of Asda, said: “This has been a summer that many retailers would rather forget. The downturn in the housing market is continuing to depress sales for those shops selling big-ticket items.
“This month’s report also highlights that as disposable incomes tighten, food retailers fare better than the rest of the market.
“Shoppers will continue to be forced to look around for the best value on offer for all their purchases – not just their groceries.”
European inflation may have peaked – is it in time?
The Eurozone and its neighbours seem to have caught a nasty dollop of US misery. Economic woe is spreading, but at last good news, real good news, seems to have emerged on inflation. Maybe the Eurozone can shake off the jitters of mid-2008, and get back on track?
Latest data out during the last few days revealed that Germany’s GDP contracted by 0.5 per cent in the second quarter; France also saw contraction and now the Bank of France is predicting growth of just 0.1 per cent in the current quarter. Spain expanded by 0.1 per cent in Q2 – remember Spain has been expanding very rapidly indeed until recently, and while many expected the pace of growth to slow, few expected Spain to move so close to recession territory so quickly.
Even Scandinavia is feeling the pinch. Denmark has already hit recession, while house prices in Copenhagen are down 1.7 per cent over the last 12 months, or so says the Association of Danish Mortgage Banks.
At least in the land of the fjords things seem to be keeping up. Mainland Norway saw a mild contraction in Q1, but in its second quarter the economy expanded at a brisk 0.6 per cent.
It could be argued that much of the Eurozone’s problems are self-inflicted. The ECB has taken far too tough a stance on interest rates – but then, equally, it is possible that the ECB, by acting so precipitately, has managed to avoid the development of deeper problems.
Official statistics suggest the Eurozone CPI rate fell in July, from 3.3 per cent the previous month to 3.1 per cent. Maybe at last we are seeing signs of the inflation beast returning to its cave.
If this does happen, markets will not be surprised. As Capital Economics puts it: “The breakeven inflation rate on constant maturity 10-year index-linked OATs has already declined by over 40bp since the beginning of July.”
If the price of oil really does stabilise at its current level, it has been calculated that as much as 1.9 percentage points could be knocked off inflation within 9 months. Presumably, if oil falls in price, inflation will fall even further. Add to that the deflationary effects of the credit crunch, and the poor showing in economic growth, and it seems there are good reasons to believe Eurozone inflation could fall rapidly. This in turn could allow the ECB to realign interest rates, and perhaps a lot more quickly than people expect.
The Eurozone surprised many by moving close to recession so quickly. It is possible that, because the ECB kept such a tight lid on inflation, the region may be way ahead of the US and UK, and be the first to recover.
The circle rotates – Japan prepares to spend its way forward
It’s funny how these things work. The US and UK economies expanded rapidly on debt – it was unsustainable – but years of good times was the result. In Japan, misery was the order of the day – the economy lurched from one crisis to another – it became known as the lost decade. Yet, in some ways, Japanese businesses and consumers were doing what many argue US and UK businesses and consumers should have been doing. They were saving.
But now, everything seems to have flipped. While the UK, US, Australia, Spain and several Scandinavian economies seem hamstrung by a legacy of too much spending, Japan is sitting pretty.
According to Bloomberg, Japanese companies now have cash equating to 11 per cent of their assets. For the last few years Japanese interest rates have been zero, or close to it, yet still they saved. It was this refusal to go out spending that held the economy back. Now the economy is in a position of strength, at a time when Western assets are going cheap.
Bloomberg calculated that so far this year the value of Japanese purchases of foreign assets is already 91 per cent up on the whole of 2007. Bloomberg says Japanese companies are on course for the biggest buying spree since the 1980s. But unlike that decade of irrational Japanese exuberance, the spending spree can be funded out of savings, not debt.
It just goes to show, things really do go in circles.
Keynes famously argued that in times of a recession, the last thing you should do is save – it may make sense for individuals, but for the economy as a whole this is a disaster.
The snag is, though, there is a danger that Keynesian economics can lead to an ever growing mountain of debt, as each crisis is avoided by getting people spending.
Some say it was the New Deal, implemented by Roosevelt, following the policies of Keynes, that helped end the 1930s economic depression. Others say the New Deal didn’t go far enough and that actually it was World War II, which, from an economics point of view, represented a kind of extreme Keynesian economics by accident, which ended the depression. Critics of Keynesian economics say the depression was ending anyway, and that the New Deal was wholly unhelpful in dealing with the problems of that era.
The debate is controversial. Some say it is Keynesian economics that created the current economic crisis. Yet Alan Greenspan, who has been criticised by so many for letting US interest rates fall too low earlier this decade, and thus creating the debt pressures that have now surfaced, is himself a critic of Keynes – at least he was far from flattering about Keynes in his book Age of Turbulence.
People such as the winner of the Nobel Memorial Prize for Economics, Joseph Stiglitz, say they are at heart a Keynesian, and yet are amongst Greenspan’s biggest critics.
Greenspan relied on interest rates to steer the economy. Keynes said that in times of a debt crisis, cutting interest rates could be ineffective, akin to pushing on string, and the only solution in these circumstances would be to increase government expenditure – especially in ways aimed at the poor.
Japan has come out of a decade of misery and emerged into a position of strength. The challenge, for the West, is to somehow avoid ten years of Japanese-type woe, and at the same time a build foundation for the longer-term. Keynes said: “In the long term we are dead,” but there again, Keynes died 60 years ago. Today is Keynes long-term, and the price we are paying for short-term fiddling, is long-term wailing.
oil
| Rates | Close | Change | Rates | Close | Change |
|---|---|---|---|---|---|
| Oil | 106.23 | 106.23 | Oil | 0.0 | 0.0 |
| Gold | 802.8 | 1.90 | Gold | 0.0 | 0.0 |
| $ to £ | 1.7662 | 0.00 | $ to £ | 0.0 | 0.0 |
| € to £ | 1.238 | 0.00 | € to £ | 0.0 | 0.0 |
| $ to € | 1.4267 | 0.00 | $ to € | 0.0 | 0.0 |
ftse
| Index | Close | Change |
|---|---|---|
| FTSE 100 | 4,122.86 | 57.37 |
| Dow | 8,419.09 | 270.00 |
| NASDAQ | 1,449.80 | 51.73 |
| Nilkkei | 7,863.69 | -533.33 |
| Hang Seng | 13,405.85 | -702.99 |
| CSI 300 | 1,868.63 | 4.43 |
| Sensex 300 | 8,739.24 | -100.63 |
| DAX | 4,531.79 | 137.00 |
UK to contract next year, warns economics group
The most damning assessment yet was published on the prospects for the UK economy by the economics consultancy Capital Economics this morning. Their central projection is for the UK economy to contract modestly next year – and recover only very gradually in 2010. But their report also hints at the possibility of a much more serious economic slowdown than that.
It was told here yesterday how many economic forecasts seem to base their projections on data which itself is often flawed. Maybe that is why there has been a total failure to predict the story that has now unfolded. The application of common sense, however, would have yielded much more pertinent conclusions.
Capital Economics seems to take greater account of the more anecdotal type surveys – that’s the type that ask consumers or manufacturers if things are better or worse than a year ago. They also seem a little more willing to use a dollop of thinking, and as a result their projections are often quite different from the forecasts produced by the likes of the IMF or OECD. On the downside, they have been predicting a major fall in house prices for so long, that it could be argued that it was inevitable they would be right eventually. But on the other hand, they did successfully predict a major slowdown in the US economy a year or so in advance, and their predictions for the UK and Eurozone were fairly close to the mark too.
The UK seems to have three types of problem, goes their rather downbeat assessment. Firstly, the various business surveys also seem to paint a picture of growing gloom. Secondly, the economic slowdown in the Eurozone, and growing likelihood that the US will slow again later this year, is making it harder for the UK to export its way out of trouble.
Thirdly is the area of bank lending, and this is the area which the big concern relates to.
Capital Economics argues that unless banks raise more capital, or sell off more assets, they may have to curtail lending by about 7 per cent. This would be a highly significant development. In fact, bank lending has not contracted since 1965. In the US in the early 1930s bank lending fell by more than 50 per cent; in Japan between the late 1990s and early 2000s, bank lending contracted by 30 per cent. So while a 7 per cent contraction in bank lending in the UK will be serious, it won’t apparently be in the same league as the contraction that helped create the US depression and Japan’s lost decade. However, in Finland, between 1990 and 1996 bank lending contracted by 11 per cent, and the result was a 12 per cent drop in real GDP over that period.
If banks do see their asset base contract by 7 per cent, Capital Economics predicts a 1.5 per cent contraction in GDP, meaning the UK slowdown will be as serious as the recession of the early 1990s.
But at last, here is some good news. It is assuming banks will have some success in repairing their balance sheets – and no doubt this is right. They may struggle to raise all the money they require, but it seems likely they will raise more than they have secured to date.
Based on this less pessimistic, but more realistic, assumption, Capital Economics reckons the UK will contract by 0.2 per cent next year, with this contraction sandwiched between 1.2 per cent growth in 2008 and 1 per cent growth in 2010.
It is the most negative forecast published so far, but, frankly, it is probably the most realistic. It will surely be a surprise if the UK does now manage to avoid an outright recession. It seems, instead, the key will be how bad the recession is.
But at least a recession will lead to lower demand for goods and services, which will curtail inflation – and hopefully will make things more affordable in the longer-term. The recovery will surely depend on how soon the improvements in affordability occur.
House prices down again, says Nationwide – it’s the biggest fall ever recorded
Can anyone be surprised to learn house prices fell again in August? The fall may have been entirely predictable, but it is still worth looking taking a closer look, if only so that we can tut-tut and nod sagaciously with a little more gusto.
Average price was down 1.9 per cent in August, according to the latest report from the Nationwide. That was the second biggest monthly fall announced so far in this year of big drops. But how does this compare with big falls seen in the past?
Over the last three months house prices are down 4.5 per cent, just a tad better than the 4.6 per cent fall in the three months to July. As for annual house prices, they are now down 10.5 per cent from a year ago, and down 11.5 per cent from peak last October.
If prices continue to fall at the same rate over the next three months, with prices down 4.5 per cent over that quarter, then from November last year to November 2008 prices will be down 15.5 per cent.
The fall in prices is without precedent. According to Nationwide data, the biggest annual fall in house prices ever recorded was in 1990, when prices fell 10.60 per cent. They also fell 2.34 and then 6.46 in the two following years. The next two years saw modest rises, but in 1995 these gains were largely cancelled out by a 2.27 per cent fall. Or to put it another way, if the next four months of 2008 are anything like the last four months, then 2008 on its own will see falls similar in scale to those experienced throughout the entire 1990s downturn.
If you then add inflation to the mix the tale becomes even sadder. Right now, the retail price index is 5.3 per cent up on a year ago. Taking this into account, then in real terms house prices are now around 15 per cent down from a year ago. Assuming prices continue to fall at the same rate between now and the end of the year as they have done over the summer, and inflation more or less stays where it is, then by the end of the year house prices will have fallen by 20 per cent in real terms.
To put that in context, 1990 saw house prices fall by 17 per cent in real terms, and 1976 saw a fall of 13 per cent.
