tony's blog

Thursday, December 1, 2011

10 days to save the euro!

It’s been a busy week so far. And not in a good way with the continuing global market volatility. And now there seems to be confirmation from No 10 that we’ve entered a new credit crunch after the world's major central banks acted in concert to provide money to the creaking financial system. And in the midst of governments and central banks doing their best, Olli Rehn, the European Commissioner for Economic and Financial Affairs, said: "We are now entering the critical period of 10 days to complete and conclude the crisis response of the EU." Accurate but not comforting. Or helpful necessarily.

It’s frankly difficult to keep up with markets and their reaction to news coming out of the eurozone. We have seen significant recent falls on stock markets which have been massively reversed this week following the concerted intervention of several central banks including our own Bank of England. One can’t help feeling that the markets are overdoing the euphoria and that this is probably driven as much by short-term position and profit taking as anything else. I fully expect this to reverse out again in due course since nothing that is being done is addressing the core problems in the market. Nor is it meant to. It is lubricating the markets and buying time for the real solutions to be put in place whatever they are. We wait with bated breath.

In the meantime, we mere mortals in the mortgage markets have to try and interpret events. The residential mortgage backed securities markets had been making good progress in their recovery with an increasing number of issues and the re-emergence of seasoned issuers such as Paragon for the first time since 2007. By my reckoning there have been 11 issues in the first 6 months of the year and 12 so far since the end of June. So it was disappointing to hear that Kensington have once again had to pull their deal because pricing had been unattractive. I sympathise with them enormously but their woes should be seen in the wider context of the markets and the global lack of liquidity rather than Kensington specific.

I would argue that UK RMBS still represents good value to investors. S&P data up to the end of Q2 this year shows that there have been no UK RMBS defaults thus far and less than 10% downgrades. This compared with more than 10% defaults and over 40% downgrades in the US market.

But without investors willing to invest in bonds on a cost effective basis, it is not possible to use RMBS to fund mortgages on a commercially viable basis.

What does this mean in practice? Well I think it means that mortgage pricing is going to firm up in response to increased funding costs and increased capital requirements.

And it is impossible for the time being for specialist lenders to rely entirely on securitisation as their core funding mechanism.

Not looking good.

Friday, November 18, 2011

The Ticking Time Bomb

With all the chaos in the eurozone recently, coupled with concerns in the US about stagnated growth and stubbornly high unemployment, it is little surprise that there are knock on effects in the UK economy. These external influences coupled with a resolution for the Government to stick to ‘Plan A’ mean that various business groups are now clamouring to scale back their forecasts for GDP growth for this year and for 2012 - and who can blame them. We are certainly living in an uncertain world at present.

Unemployment certainly remains a worry. Recent figures from the Office of National Statistics revealed that unemployment has already risen to its highest level for 17 years, rising to 8.3% or 2.62m. Specifically youth and long term unemployment remain a particular concern with these figures rising dramatically. The number of 16-24 year olds out of work has reached 1.02 million (21.9%).

You may recall, from the blog I wrote in May, about my concerns for a rise in unemployment in the future. I suggested that unemployment is a lagging indicator of the economy and had yet to reflect the impact of the austerity measures - the slowdown in consumer spending and the pending cuts in the private sector. I further speculated that the private sector would be unable to fully compensate job losses in the public sector. Economists seem to agree with me. John Philpott, chief economist at the CIPD said the latest figures ‘confirms that the private sector just isn’t creating enough jobs at present to offset public sector job cuts’. Well I think this will remain true but worryingly with GDP so weak I can’t see how we can expect to see anything but depressing statistics on the job market for the next year or so at least. And with higher unemployment of course there are lower tax returns and consequently less income and this is certainly going to impact on the Chancellor’s deficit plans.

In its latest quarterly economic forecast, the CBI predicted that unemployment will continue rising next year, peaking at 2.75m in Q4 2012. Accountancy group BDO has predicted a worsening situation in the labour market with its Employment Index falling to 93.4 in October from 95.9 in September. This is the first time this year that the index has fallen below the crucial 95.0 mark, showing that hiring intentions across the board are likely to remain weak.

So what’s to be done? Well I think now is the time to be proactive. I’m in agreement with CBI and some of the ‘Plan A plus’ proposals which look at many measures but includes proposals  to target tackling youth unemployment  and investing in education and skills. We also need to think of some plans to tackle long term unemployment and give people the confidence, skills and resources to get out of this vicious cycle.

This is a good start. I don’t think we can afford to sit around with a wait and see attitude.

Tuesday, November 8, 2011

The Return of Equity Release

Equity Release: universally considered as the bad guy on the block in lending terms. Much maligned by critics, why has it had so much bad press over the years?

Well there are many myths attached to it, probably the most universal being the consumer risks losing his home. (According to research by Safe Home Income Plans (SHIP) some seven out of ten consumers believe that opting for equity release means you have to move out of your home.) However the simple fact is that as long as that property remains the main residence, the customer can remain in it for the duration of his life. 

More concerns follow: you won’t be able to leave an inheritance; your children will be saddled with debt; you won’t be allowed to move home and equity release is ‘unsafe’ and ‘unregulated’ etc. Yet all of these fears are pretty much unfounded if the right product and provider are chosen. Early products didn’t have the safeguards and protections that they do now. This type of lending is seen as specialist and carries risks not found in conventional mortgage lending; hence it has had its own regulatory regime for some years now.

My view is that equity release has to be a force for good if handled with care and compassion. We can’t get away from the fact that the UK population is ageing and going forward there is insufficient pension provision out there. Moreover many borrowers don’t have the capital put aside to pay off the interest only element of their conventional mortgage so there is a genuine need for this product. I can only see that demand for equity release products will grow in the next few years. Its time has finally come in my view. What is important is that the right products are in place to cope with the demand so this much maligned sector gets some positive PR at last.

As Andrea Rozario, director general of SHIP said: ‘The wealth locked up in a property…will continue to be the greatest asset most people have as they approach retirement’. So they should make the most of it.

Thursday, November 3, 2011

The way out of this financial crisis: the art of deleveraging

So last week we thought the Eurozone debt deal had been done. And on the face of it, it looked like good news, or at least the stock markets seemed to think so as shares rose across the globe. Of course the devil is in the detail and I would like to see just where the extra monies to support the stability fund were coming from. And will €1trillion be enough? Also the European Banking authority has said that the European banks must raise £91bn of new capital to protect themselves against losses resulting from any future defaults by June 2012 which seems rather a tall order. There certainly is a need to push the measures through rapidly to ensure confidence is retained in the markets.

But that was last week and as we now know, things have moved on swiftly, and not for the better, with the announcement of the Greek referendum which has thrown all Eurozone bail-out plans into chaos. Leaving aside the Greek issues and whether they will or will not be able to sort out the new challenge, it is worth looking at the underlying effects on the banks and the economies of rebuilding capital. This is not just a Eurozone phenomena, it is global.

I have to say I concur with the comments Mervyn King made to the Treasury Select Committee last week. He alluded to the fact that whatever decisions were made in Brussels, this would not be a long term solution but would only ‘buy a year or possibly two years breathing space’ and the ‘underlying problems hadn’t changed at all and they won’t change’. So is this just papering over the cracks then?

As I have mentioned before, the markets have never really been entirely fixed from the original credit crisis four years ago. The world prior to August 2007 was a very different place where it was commonplace for governments, banks, companies and even consumers to over borrow which in turn stimulated economies too much. This was made possible by a too optimistic view of continuing rising economies and asset values and was encouraged by relaxations to the capital and liquidity requirements of banks. This meant that not only were they able to lend so much more for any given €1 of capital but they also needed far less by way of a return on that loan to meet their threshold return on capital. Everything was set up to “over-stimulate” the global economies and that’s exactly what happened. This led to unsustainable asset price inflation which subsequently became an impossible situation when things went wrong. And with the beauty of hindsight we can see that this was always likely to happen.

Today banks are building up capital and liquidity to more realistic levels. Mervyn King mentioned that when the QE programme started, banks had a leverage ratio of 40 to 1 and now it is 20 to 1 so they are going in the right direction. However banks have some way to go; Mr King has expressed that he would like the leverage ratio to go lower. And that’s not just within banks but corporates and government too.

There are three main ways a bank can achieve this deleveraging: issue more equity capital, retain more profits as part of Tier I capital reserves or shrink loan books through deleveraging programmes. Europe’s biggest banks have ruled out tapping the equity markets to find this money. If they are not to call on more government bail-outs then they will have to trim their balance sheets. This will be evidenced by a combination of lending less (bad news for the economy as it will slow things up even more) and actively reducing assets from their balance sheets.

Active deleverage programmes are going to become more familiar to us all and we will see increasing incidences of banks actively “re-broking” their mortgage books out and encouraging borrowers to move their accounts away. We will also see an increase in mortgage and other asset sales if I am correct.

Some banks are managing their deleveraging programmes themselves but to manage this effectively calls for a wide range of key skills including cross-selling techniques, JVs with other lenders and of course corporate finance experience. This is not something that every lender will feel it has the ability to deliver so we can expect a growth in specialist asset management businesses like Home Funding which can manage this on an outsource basis in order to meet the banks’ overall strategic objectives and financial needs. It does seem to be a very pragmatic solution and we are going to see more and more of this type of activity going forward. However there is an art to this and the key is to get the balance right.

It would seem that wholesale deleveraging could help put the markets back on an even keel and I for one welcome it.

Monday, October 17, 2011

We're All Doomed - Part 2

Hate to say I told you so… but sadly in this case, I told you so! Things are getting increasing gloomy in the economy – you only have to look at the latest ‘terrible’ unemployment figures (I did say previously that the private sector wouldn’t be able to soak up the public sector fall out – people were fooled with the lag effect from the Government first announcing austerity measures and the reality of when it kicks in), depressing manufacturing data and stagnant house prices to see that we’re not getting out of this mess any time soon. Additionally, the Euro zone crisis is hanging over us like a dark spectre.

So what are the powers that be doing about it? Well whilst acknowledging that the unemployment statistics were ‘disappointing’ David Cameron has firmly rejected criticism and said that he would stick to his plans to reduce the deficit of nearly 10%.  

So what now Mr Mainwaring? Leading economists have called for George Osborne to announce a job-creation package in his Autumn Statement next month as they are concerned that the latest £75 billion quantitative easing scheme is unlikely to transform the county’s economic prospects.  

The Chancellor will be of course reluctant to do this as the plan has delivered ‘record low interest rates’ and in altering his course may upset the ratings agencies who may then look again at Britain’s credit rating. Mr Osborne also has the added concern that public sector borrowing has increased sharply, higher than economists had expected and is therefore likely to miss his targets for cutting Britain’s deficit. But maybe that’s a gamble we should take at this stage.

It really is a fine balance. In my view I think the Government should be a little more flexible and show that it is willing to listen, be less rigid in its approach and consider other options. We need to bring back some consumer confidence fast.

Thursday, October 13, 2011

Making sense of the markets

What’s happening out there I hear you cry? Well debt markets are still in a bad place. In effect they have never really been entirely fixed from the original credit crisis 4 years ago brought on by optimistic overleveraging by banks which have stimulated economies far too much and led to unsustainable asset price inflation. There was a sense that things had recovered but since July they have slipped back again. In truth, it isn’t because they have got worse, its more to do with the earlier optimism slipping away and realisation that things are still fundamentally in a bit of a pickle. They have been since August 2007 when this all kicked off.

Today we are seeing banks building up capital and liquidity to more prudent levels. Good news then. Well yes however what this does is to remove, by a geared factor, the amount of credit available in markets. No wonder economies are slowing and stopping. We have seen many analysts lower their growth forecasts for the UK but my expectation is for the UK growth to go negative.

Unfortunately while this is going on a negative feedback loop is initiated whereby slowing economies engender higher levels of defaults which eat into banks Tier I capital ratios which causes them to reserve more and so more capital is taken out the system on a geared basis and so on and so on….

I mention this as the background to the markets as I see them. Add to all of this defaults and other shocks in Eurozone and elsewhere, plus ongoing problems in the US and it all gets a lot more troubling. Markets don’t like shocks (unless you are a trader – short selling and so on – volatility is where a lot of money can be made).  So we have a nervous global financial market looking for some clarity and strong signals from leaders as to impacts on economies, markets and banks as a result of default/no default. And they aren’t tending to get it, notwithstanding the recent approval from Germany to expand the powers for the EU’s main bailout fund. We have the usual market reaction to this – large swings in market prices on the back of comparatively small amounts of news.

So impact on UK? Definitely. We are less exposed to Greece than some countries but are not immune. We have larger exposures to countries like Ireland (which seems to be doing a good job in recovering at the moment). What is the extent of the impact – impossible to say right now. The entire market has seen Greek default as a near certainty with 2 models: unplanned default or planned default.

My view is that default itself seems to be a dead cert. It looks like the Europeans are working on plan B and buying enough time with the latest bail out to move to Plan B – the planned default with banks bolstering their capital in anticipation. As I mentioned though, losses or increases in capital to meet potential losses have a multiple effect in the amount of credit and liquidity they remove from the markets. This is already happening and I suspect will get worse before it gets better.

Monday, September 5, 2011

Let Battle Commence

So the lines are drawn. In one corner sits Confederation of British Industry director general John Cridland saying that the Government would be ‘barking mad’ to push forward with plans to ring fence UK banks given current grim economic conditions. And in the other corner sits the Chancellor George Osborne and Vince Cable taking Mr Cridland to task signalling their backing for the ring fencing plan.

It will be interesting to see what comes out of the final report to be presented by the Independent Commission on Banking (ICB) on September 12. Its provisional prescription for higher capital requirements, bail in provisions and a measure of separation between retail and investment banking has certainly shaken up the banking industry.

I can see both sides of the argument and whilst I agree that the timing isn’t ideal, my view is that short term pain is needed for long term gain and these suggestions are pragmatic and necessary.

Of course there will be huge amount of costs and disruption in setting up a new system with potentially higher funding costs which could ultimately get passed on to the consumer. It’s natural for banks to recoil against any change to the way they operate. So what will it mean for the mortgage industry in terms of supply of credit and cost of funds?

Difficult to answer and as usual there are two sides to this. By separating the investment bank activity from the ‘normal’ banking you take away the cross benefit to the retail bank from investment banking activities. How so? Investment banking allows banks to run a significantly leveraged model through trading and derivative activities which require significantly less capital than lending to you or me. The profits to be made are huge and across an integrated bank these allow the bank to maintain efficient balance sheet ratios and subsidise costs of lending activities.

So without these ‘subsidies’ the costs are likely to go up for the consumer at least in the short term. But you have to look to the future.  By taking away these other profitable albeit racier activities you remove a good degree of risk to banks.

The solution is to be realistic and pace its implementation. If we take the opportunity now to make these changes, over the longer term we will be left with a more robust financial system and ultimately it will be in the taxpayer’s interest.

Thursday, August 11, 2011

Life's a Riot

So we have more gloomy economic data to contend with on top of the riots and turmoil in the markets? Manufacturing data fell by 0.4% in June and Britain’s deficit in goods trade with the rest of the world widened from £8.5bn to £8.9bn in June. Not looking good and I guess it’s hardly surprising that we are starting to hear more of the words ‘double dip’ from many analysts. Oh to be in England…! Then again the rest of Europe and the US don’t look so hot either at the moment either.

With this backdrop it is hardly surprising that Mervyn King and his friends at the Bank of England have revised UK growth forecast for the year from an always optimistic 1.8% to a not so healthy 1.4%. I predicted this would happen in June and  sadly I think he may have to revise this forecast down again in the next couple of months; things don’t look to be getting better anytime soon and not only do we have to look at economic data at home but what’s happening overseas also. Surely it’s only time before the Office of Budget and Responsibility will follow suit very soon forecast down from its buoyant forecast of 1.7% for the year. 

For me, I think 1.1% for the year is more likely a figure. And that’s me being optimistic!

Tuesday, August 2, 2011

The Black Hole

Santander UK recently announced a 21% drop in gross mortgage lending for the first six months of 2011 compared to the same period of 2010 and similarly today Barclays reported a drop of 10% for the same period. Santander said it reflected the weaker pipeline from the last quarter of 2010, representing reduced consumer demand.

I’m led to believe this scenario is not uncommon and other lenders are facing a similar drop in gross mortgage lending for the first six months of the year - and beyond.

Surely therefore this makes the CML’s revised market forecast for 2011 predicting an increase in gross lending to £140bn from £135bn implausible? This seems to go against other data which suggests general stagnation of the market due to severe rationing of funds by lenders and lack of demand from would be buyers prompted by fears of a downturn in the economy including higher unemployment and weaker consumer confidence.

I appreciate that it is sometimes good to talk the market up. However it is very difficult to see exactly where this extra lending is coming from. Methinks another revision is on the horizon.

Thursday, July 14, 2011

A change of heart

I’m worried that my blogs are becoming a little predictable with their gloomy outlook on the economy and the world generally. All I seem to do is write bad news stories although arguably I just write about what I see. However even I was starting to get down so this week I wanted to find something positive in the economy to write about. I was determined to find some good news.

And on the face of it I found some.

So three cheers then. The Office of National Statistics claims unemployment is down. And inflation has fallen. I guess therefore we can celebrate and go on a shopping spree down the High Street then.

Sadly not the case. It is true that unemployment has fallen by 26,000 in the three months to May. This is particularly heartening for the 16 - 24 year olds where the latest figures show a drop of 42,000 in the three months to May to 917,000. However looking beyond the headline figures there are more worrying statistics. For example, the claimant count is up rising 24,000 in June to 1.5m, there are 5.4 unemployed people vying for the same job plus there is evidence that most young people are putting off looking for a job and are going back into full-time education which accounts for the drop in figures. (The real test will come in September with the yearly influx of school-leavers and graduates into the market.)

And what of inflation? Well it turns out that the reduction in the CPI was largely due to the early summer sales, with prices for games, toys and audio-visual equipment all falling. The cost of staples – such as bread, meat, fish etc- continue to soar and will add to concerns about household finances. So despite the surprise drop in inflation, economists still reckon CPI is likely to breach 5% in the autumn as higher utility bills kick in. So the analysts say this is a blip.

Ah well. I did try…

Friday, July 8, 2011

It's grim out there

More depressing news from the High Street. According to the British Retail Consortium, shop prices rose at their highest rate for two and a half years in June. This is hardly an inducement to lure would be shoppers back into the stores.

And this follows a run of bad news with Habitat, TJ Hughes, Jane Norman and kitchen and bathroom company Homeform, all having gone into administration. The gravity of the High Street downturn is outlined further in new research published which shows UK retail chains closing stores this year at a rate of about 20 a day. The latest figures from PricewaterhouseCoopers show 375 retailers went bust in the second quarter of 2011, a 9% increase on the same period last year.

So how can we persuade customers to return to the high street?

The simple answer is we can’t, certainly not in the short term. Recent research from the Joseph Rowntree Foundation found that British families need to earn 20% more than they did a year ago to remain out of poverty as the squeeze on household budgets worsens. Any spare funds seem to be earmarked for cutting mortgage debt, as outlined by recent figures from the Bank of England. There is little money left over in the kitty.

It’s fair to say that weak consumer spending has devastated the high street and I fear there is more pain to come. Conditions will remain difficult for some time.

Tuesday, July 5, 2011

The US Connection

The Federal Reserve has announced that it has cut its growth forecast for the US economy in the face of higher energy prices. It now estimates that the US economy will expand between 2.7%–2.9% this year, down from its April forecast of 3.1%–3.3%.

This follows on the back of recent figures published by the IMF, which has lowered its UK growth forecast expecting growth of only 1.5% this year, well below its 1.7% forecast in April and the 2% it predicted last autumn.

While the US and UK markets are very different, economic indicators across the Atlantic seems to have been plotting a parallel course to its UK counterpart. Of course, these days it is very much a global thing: a crisis in the euro zone can have a huge impact on the US markets via contagion. However I would argue that the UK rather than any of its other euro colleagues mirrors what’s happening in the US, albeit lagging a little way behind. So it’s worth keeping an eye on the US economy. Until their economy picks up we can see little hope of ours making a meaningful recovery.

Tuesday, June 14, 2011

It's a numbers game!

So where do we think we are on GDP? It’s mightily confusing We’re now being told that economic growth is likely to undershoot the Government’s official forecast for the second quarter in a row after worse than expected figures from Britain’s crucial services sector. Markit, the financial consultancy, reported that businesses experienced a slowdown in growth last month and taken together with poor manufacturing and construction figures the data points to an overall sorry 0.3% between April and June.

So not inspiring confidence is it? Then you have various organisations revising their predictions. The CBI and OBR now expect growth to be 1.7% for 2011 whilst the IMF predicts a lower 1.5%. I have to say that where we stand at the moment with some of the worst austerity measures still to kick in, and declining consumer confidence, these numbers look a tad optimistic. I predict that these forecasts will come down again.

Good news for borrowers though. Whilst economic growth falters it is unlikely that the Bank of England will do anything but hold rates as they are at 0.5%.

Thursday, May 26, 2011

The 64 million dollar question

So interest rates are back on the agenda. The latest Organisation for Economic Cooperation and Development (OECD) Economic Outlook report suggests that interest rates will have to rise sooner rather than later. In fact the OECD expects the Bank to lift rates to 1% from 0.5% this year and to rise by a further 1.25% next year bringing it to 2.25% by the end of 2012.

How so? Well the OECD’s chief economist, Pier Carlo Padoan, says a rate rise is desirable as it will prevent ‘continued increases in inflation expectations’. He said: ‘We would be in trouble in the UK and elsewhere if, in a period of slow growth and fiscal contraction, you also have inflationary expectations getting out of control’.

And this thought is echoed by others. In a parting shot to his soon to be former colleagues at the Bank of England’s Monetary Policy Committee, arch hawk Andrew Sentence reiterated his call to raise interest rates. He said: ‘Continuing to accommodate inflation makes it more likely that a sharp policy correction will be needed’.

So it’s all up in the air again. But as echoed in previous blogs, I am not of this school of thought. Looking at the growth figures for the first quarter of this year, consumer spending fell by 0.6% during the period but more worryingly than this, there was a ghastly drop in business investment. A 7.1% fall during the quarter. I fear that raising rates on the back of this GDP data would do no good to the economy and in fact tip it back into a recession.

Sunday, May 22, 2011

Lies, Damned Lies and Statistics

So what’s to be made of the latest unemployment figures announced by the Office of National Statistics? On the face of it, it’s positive news. Unemployment fell, the number of people being made redundant dropped to its lowest level since the start of the recession, employment rose by 118,000 and the number of jobless 16 – 24 year olds did not break the politically sensitive 1 million level. So all good then?  Or is it?

The latest quarterly Labour Market Outlook from the Chartered Institute of Personnel and Development shows that 39 per cent of employers are planning to cut jobs – the highest level since the survey began in 2004. It also said a slight rise in private sector recruitment was being cancelled out by the cull in the public sector. Not looking so good now.

There is a view that unemployment is a lagging indicator of the economy and has yet to reflect the impact of the austerity measures – the slowdown in consumer spending and the pending cuts in the private sector. Plus closer analysis of the figures suggest that the bulk of the rise in employment came in January and since then numbers have fallen away, signalling a slowdown in job creation. That, coupled with the increase in claimant count to 12,000 in April could suggest that the job market is actually losing impetus.

How confusing for us mere mortals.  Sadly my belief is that we have some way to go before we can say we are on the road back to recovery. I agree with economist Howard Archer, and have stated thus in a previous blog, that unemployment will go up again later in the year as the private sector will be unable to fully compensate job losses in the public sector.

Watch this space.

Friday, May 6, 2011

Alone but confident!

Britain seems to be more and more isolated these days in its decision to leave interest rates at a low level. Just yesterday the MPC made the unsurprising call to leave rates at a record low level of 0.5%. And economists seem to now be suggesting that the earliest rates will go up will be November this year. Some even go so far as to say 2013 now.

Other countries seem to be going the other way. India, Russia, Australia, China Brazil and the eurozone have all been raising rates to counter inflationary pressures. Poland, Hungary and Denmark have also taken the plunge so why not us?

As I explained in my last blog economic circumstances in the UK do not make such a move favourable. There are more ways to combat inflation than putting up interest rates and we should remember we have had a significant level of fiscal tightening through increased taxation. Of course every country is unique and Britain has a disproportionately large banking sector. The economy remains extremely fragile, growth is weak and to raise rates now would almost seem an irresponsible act. Or to put it more strongly, in Roger Bootle’s words, ‘disastrous’.

Of course we are not completely isolated. The United States and Japan to name but a few are on side with Britain in keeping rates at low levels.

However it does seem more and more that we are out of kilter with the rest of the international markets. 

Thursday, April 28, 2011

The winds of change

There were a few bullish predictions made at the start of this year from various industry commentators as to when interest rates would start rising again. Some analysts predicted as early as March but the money seemed to be on May.

Well I was never in this camp. In fact I had a light hearted wager back in February with a few colleagues as to when the MPC might raise rates again and my prediction was February 2012. At the time my guess was scoffed at but I can’t see too many people laughing now.

So why has nothing happened and why is possible that we could get through the rest of the year without a rate rise? A combination of factors of course but in the main it’s the fragile state of the economy. Figures just out point to a growth of 0.5% in the first quarter of the year but this is scarcely something to shout about. In fact taken against a backdrop of a drop in growth in the last quarter of 2010, we are at best in neutral territory but where do we go from here? Worryingly construction was down by 4.7% which does not bode well going forward. Also a quick look at the recent GfK NOP’s Consumer Confidence Index suggests that confidence is falling off a cliff with the figures last dropping so low during the recession. I can’t seem unemployment statistics recovering any time soon either. This coupled with stagnant house prices (at best) and low lending levels means that we are certainly not out of the woods with the economy yet.

I think the MPC will take this into account at their meeting next week and rates will be held despite the lobbying from arch hawk MPC member Andrew Sentence to push rates up.

I think my bet’s looking pretty safe for the time being.

Thursday, March 31, 2011

EU proposed Directive on mortgage credit: One step forward, two steps back

I agree wholeheartedly with the CML in their press release about national mortgage markets being highly idiosyncratic. Indeed the FSA initial regulatory regime was based on disclosure to allow borrowers to understand what they were getting and then compare one lenders offering with that of another – just like the EU are now suggesting.

We know that in practice this doesn’t provide the whole solution. Seems to me that we are ahead in our thinking in the UK and this EU directive will serve to complicate and confuse……

We are moving backwards I fear!

Friday, March 25, 2011

So after the budget what next?

Delivering a budget of any substance when you have no money in the coffers is tricky to say the least. Therefore it is not surprising that, in my view, the budget was somewhat a damp squib. Balanced, politically astute and certainly some headline grabbing initiatives but in reality nothing to help get the market back on track - something the Government recognise themselves given that the OBR has downgraded growth assumptions again from 2.1% to 1.7% this year.

So after the budget, what next? Interest rates are certainly something to watch with care. The inflation target of 2% was reconfirmed Wednesday. Whilst recently the majority of MPC members voted for no change, two voted for a 0.25% rise and one, arch hawk Andrew Sentence, went for 0.5% increase.

Whilst there are those economists who say that putting rates up will unquestionably serve to reduce inflation, I would like to declare myself to be, in their view, an economic illiterate by saying that I don't agree with them. Why? Well I can see a risk of higher rates causing inflation to rise by increasing costs - remember 'cost push' inflation? How will putting rates up in the UK head off inflation which has been caused by tax rises, higher energy and commodity costs?

I have to accept that in the case of inflation triggered by a weak pound, higher rates will help by making the UK a more attractive home for foreign investment chasing higher returns but at what cost if that causes the economy to stumble further and economic activity to reduce yet again?

Just how many times can the Government reduce their growth forecast I wonder?

Thursday, February 10, 2011

A Painful Process

Looks like the austerity measures are finally starting to kick in. It’s only now that the real effects of Government’s action to reduce the deficit are beginning to be felt. And boy, does it hurt.

Street cleaning and rubbish collections are to be reduced, some 500 libraries and hundreds of sports centres are set to close along with thousands of services for disabled, the mentally ill and elderly as authorities are obliged to slash their budgets by as much as 25 per cent this year. The fallout will have a huge impact on jobs with suggestions that at least 150,000 jobs will be lost in local authorities in the next two to three years (total 410,000 public sector job cuts).

So the pain begins. And it could take a number of years to flush this hurt through the system.

My question is what will be the impact on wider unemployment statistics? Previously Mervyn King suggested that the private sector would take up the slack and would be in a position to fill vacancies from refugees from the public sector. Sadly, as I’ve said before, I don’t think this looks feasible. The CBI concur with my view and suggest that the unemployment rate will jump from 7.9 per cent to 8.4 per cent as the private sector struggles to offset public sector job losses as well as providing for new entrants into the labour market. Its summary is that unemployment will not start falling for two years.

Clearly this is worrying. Especially since many analysts are suggesting that the economy will not grow as quickly as the OBR have suggested raising fears of a jobless recovery.

Let’s hope the Government take notice.