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.

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. 

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.

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!

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?

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.

What now for first-time buyers?

In issue 23 of News and Views published by the CML it was suggested that the contraction in UK mortgage lending since 2007 has been the most severe on record. Furthermore, between 2007 and 2010, as many as 800,000 potential first-time buyers had been effectively frozen out of the market. Lending criteria has tightened significantly for the first time buyer with the average LTV for this group of borrowers falling from 90% to 75%.This trend seems set to continue with the major lenders choosing to concentrate on less risk adverse borrowers who have greater equity in their property.

Meanwhile, rents are continuing to be pushed up as more people turn to renting a home instead of buying one. RICS said that demand from would-be renters was rising while the supply of new homes to let was falling.

So what is to become of this disenfranchised group? Are they doomed to languish in their parents’ homes until conditions improve? Is getting the deposit they so desperately need now a matter of long-term saving or pleading for handouts from kindly relatives?

It seems to me that more needs to be done to help this group of borrowers. Traditionally their role in establishing a healthy mortgage market is crucial so they shouldn’t be ignored. If lenders are doing their job and assessing affordability on an individual basis then surely some tranche of their lending allocation can be provided specifically for first time buyers. Then again, market share is no longer the problem so why should they want to do this without incentive?

Maybe the market needs to think again.