Latest UK economic view

Gordon Brown has put pressure on Lloyds and HBOS to fall in line with the bonus crackdown that has been meted out to Royal Bank of Scotland. RBS has seen bonuses slashed by up to 90% after accepting £20bn from the taxpayers, making a total of £175m in bonus payouts this year.
Lloyds is in the spotlight for announcing potential bonuses of £120m after warning of annual losses amounting to £10bn at new sister-company HBOS.

In today's complex contractual environment, it seems that some bonuses are a legal requirement - in which case they should surely be ear-marked as salary?? The fallout from the bonuses wrangle is set to continue with the spotlight falling on any company that receives government backing.
The government is currently outlining a scheme to underwrite some of RBS riskier assets called 'toxic structured credit assets', this is designed to strengthen the position of the banks and will enable them to effectively 'cap' losses.
In other recession news, high street media retailer Zavvi closes it's doors on 20th February, although some jobs have been saved after deals with HMV stores and another company.

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Recession will be 'deeper than expected'

Mervyn King governor of the Bank of England expressed his view of the recession today and was forced to admit that his original estimation of the impact was flawed and the recession would be 'deeper than expected'. However, many of us have long suspected that this recession was going to be deeper than the so called 'experts' had been stating. This just goes to enforce the view that politicians and economists alike should admit that they have little control or even understanding of the workings of the economy - although admittedly that type of honesty probably wouldn't help matters... King acknowledged that the GDP could fall by 4% 'at best' which is certainly a more realistic view than previously expressed.
In the background, feelings are running high over proposed bonuses particularly at board level. This, alongside the claims by sacked HBOS risk manager Paul Moore that he was sacked for warning the bank that they were potentialy over-exposed. He is gunning for his former boss Sir James Crosby, who has also been an advisor to Gordon Brown providing advice on options for improving the function of mortgage finance markets. Sir James has resigned from his role in the FSA saying that he was worried about becoming a distraction to the FSA and felt that the right course of action was to step down.

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Government to investigate bank payouts

Alistair Darling has announced an investigation into the way banks pay bonuses following the assignment of billions of pounds to bail out banks, including a majority stake bought by the government in the Bank of Scotland. The banks have complained that they are contractually obliged to make some payments, an argument that is not going to hold sway with the taxpayers who would argue that without bailouts, their employees would be collecting dole.
Already Northern Rock, another company under the ownership of the taxpayers, has announced performance-related bonuses for it's 40,000 employees.
Darling has said "I am now setting up a review which will examine how banks are managed, bank boards have a duty to ask more searching questions of their executives ..... when times are good as well as when they turn bad."

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UK bank rate drops to 1%

As expected, the Bank of England dropped the base rate to 1% today setting a new record low for the lending rate in the UK. Those of us with tracker mortgages will get short-term benefits, but concerns about the wider economy are still a major worry.
In other news, the jobless figures recently released were higher than expected helping to give the overall impression of a recession which is still not responding to government intervention.
There is still a feeling that the rate could reach zero fairly soon, what is clear is that reductions thus far have not had the desired effect. The hidden effect of these interest rate reductions is the effect that it will have on investments and pensions, which will bite us all in the long-run.

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Interest rates to drop again

Following in the wake of other major economies (US Federal reserve set interest rates at between 0 and 0.25%, Japan set rates at a mere 0.1%), the Bank of England looks set to lower the base rate to 1% or even less. In the rest of Europe, rates are set at 2% and due for another drop next month.
All around the world, economies are setting their lending rate at unprecedented low levels in the hope that the economy will be stimulated as a result.
The threat of increasing the money supply (printing money) is still a possibility, but would have a potentially devastating effect on the exchange rate as the perceived value of sterling would plummet. That might sound like a great benefit for exporters, but when you consider the lack of a manufacturing base, the effect on our imports will be more significant.
The news of the drop in base rate will be welcomed by those who have a tracker mortgage that will follow the base rate.

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UK bank rate drops to 1%

The upside of a recession

There are always some niche areas that benefit from an economic crisis and UK holiday group have announced a £50m investment plan and are planning to recruit 2,000 workers for their various resorts around the UK.
How is this possible?
Two factors have combined here, 1) The general economic climate has persuaded some families that they cannot afford a holiday abroad, yet they are still keen to have their traditional Summer break in an affordable environment. 2) More significantly, the exchange rate has put off many families from going abroad, the pound being weak against the Euro amongst other currencies.
For several years now, holidays have not been a priority for my family, but where we have taken a break it has been strictly on British soil. This years planned holiday will take advantage of free shared accommodation that we have been offered rather than a costly holiday of our own. In years to come, when there is money in the bank, I certainly intend to 'push the boat out' and take the family to some favourite haunts world-wide. For now, I haven't even renewed my passport...

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How do we solve the economic crisis?

This is the subject of much discussion in the 'blame culture' that has developed over the last few decades. We demand to know who is to blame for the situation and how can we stop it happening again. This is as true in the global economic situation as it is in the workplace, we expect answers and have procedures in place to prevent unwanted events.
However, when we are discussing a free market economy, we have to accept the 'bust' along with the 'boom'. Anyone who has studied the economy knows we have been experiencing a boom, and the bigger the boom, the harder they fall... A speech from some years ago by Gordon Brown proclaims the longest sustained economic growth for centuries - Right there is the reason for the deepest recession we could ever have imagined...
So what now?
Controls, measures, plans... all manner of suggestions are out there and each one strangles the free market, each one takes us closer to the 'monster' we thought we had defeated at the fall of the Berlin Wall twenty years ago. I don't wish to appear right-wing because economics, not politics is the issue here, but I can see how the free market is supposed to work, and the boom and bust is part of that system. I can also see that the more controls you place into the system, the less 'natural' balance it has, and the more it is susceptible to wild swings. Once you try to control the free market, you have more or less killed it off.
When things are going well, everyone wants to live by the 'sword' that is the Western free market, when things are going badly, no-one wants to die by it...

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UK economy set for deep recession

According to the International Monetary Fund, the UK economy is set to shrink by 2.8% this year - a significant drop compared to previous predictions of between 1 and 1.5%. This could turn out to be the worst drop experienced since the 1940's.

On reading the headlines, this could sound like we will all be destitute, but when you consider that the economy has been over-inflated on debt for decades, it is hardly surprising that there should be a redressing of the balance somewhere along the line. Don't forget, a week ago there was every chance that a footballer was going to change hands for over £100m - just thirty years after the very first £1m player (Trevor Francis sold by Birmingham City to Notts Forest).
A good indication of how the economy has been over-inflated, is the sharp rise in housing prices over the last decade. When you look at the graph of house prices:

The steep rise is way out of line with the 'natural' climb in house prices that you would expect to see in line with inflation and the general cost of living.
[in the picture (left), the thirty year trend is shown as a red line - it runs left to right and sits at a level between the low points (valleys) and high points (peaks)].
When the actual price varies so wildly from the trend, there should be a redressing of the balance, and prices will most likely fall to form a new low point as indicated 'X' by hand on the diagram (just my rough guess...).
The knock-on effect of the house price rise specifically has been to lead people to believe that they are wealthier than they actually are, and to borrow against this capital. This effect knocks-on into the economy as a whole with spending being driven by these 'fantasy' house prices. The drop in economic activity is due in part to reality kicking in a house prices slowing down as they were bound to do eventually. Of course the banks got caught up in the same fantasy and the credit crunch was born...

The economic crisis has had, of course, a global effect and in the global picture, it is estimated that 50 million jobs could be lost worldwide this year in a' worst case scenario' prediction based on the current economic crisis. It is estimated that the developing world will suffer most.

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UK in recession

Well, readers of this blog will hardly be surprised to hear that the UK is now officially in recession. The only real point of interest is the rate at which the economy is declining. GDP shrank by 0.6% in the third quarter of 2008. The predictions are coming in of a shrinkage of around 1.2% or 1.3% for the final quarter which is an indication that the decline is gathering pace at a somewhat alarming rate. [UPDATE: the figure announced was actually 1.5%]
One of the problems that will face the government is that now a lot of economic bolts have been 'shot', how much more intervention can be introduced in the face of the fact that the economic measures so far employed are having little effect in arresting the decline?
We knew from the start that this period was going to be deep and dark in economic terms, and so far there has been nothing to suggest that this is not the case. For those that are not currently experiencing any negative effects (and there will be plenty that are not directly affected as yet), spare a thought for the growing line of jobless folks who stand little chance of finding decent alternative employment any time soon.
No we are not starving, but if we don't learn quickly how to cope with the hard times, and learn the lessons of habitually over-extending our budgets, the economy will be in for a severe bashing.

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Unemployment effects

I remember first hearing the theory that a rise in unemployment leads to a rise in crime, and having one of those 'wait a minute...' moments. Are you saying that if I become unemployed I am more likely to steal something? How short-sighted, prejudgmental and downright rude...! The sort of thing you would expect from a politician - who are quite adept at demonstrating white-collar crime and sleaze despite the fact that they are wealthy fat-cats with excellent prospects. Peter Hain should be able to explain how it was that £103,157 of donations were not properly declared, however it seems such a paltry sum got overlooked... an administrative error.. I'd like someone to make such an administrative error in my favour...

However, I digress from my theme... my own feelings are that if you are the sort of person that is likely to steal, then having more time of your hands whilst being unemployed will make you more likely to steal from the general public rather than your employers, but really theft, crime, muggings and the like are a result of your state of mind not the state of your employment, job prospects or CV.
Whilst it is true that the criminal classes (?) are less likely to be actively pursuing work, it is NOT true to say that a person is more likely to become a criminal when they are unemployed.

Nevertheless it has been reported that the current financial crisis has had an effect on the crimes that are being committed and some of those specific areas of 'petty' crime are listed here:

• Shoplifting - a marked increase has been evident in supermarket thefts leading to some surprising goods such as organic food being security tagged.
• Garden theft - theft from gardens and allotments are on the increase as the fruits of the hard-work of domestic agriculture is being diverted to petty thieves.
• Burgulary - There is concern that burgulary will be on the increase as a result of the failing economy and leaked government memo's have leant gravitas to this view.
• Fuel theft - 'Bilking' (driving away from a forecourt without paying) and fuel theft from vehicles on the road have both been reported as on the increase.
• Insurance fraud - Fraud such as deliberately writing off vehicles and false claims against holiday insurance, are on the increase - it is estimated that false car insurance claims cost other insurers around £40 a year.

Having looked at the evidence, there is a fair argument that economic crisis can lead to a crime wave, but I would stop short of linking unemployment with crime - how many burglars hold down a steady job I wonder? The list of crimes above does not signify a collapse of society into chaos, just an increase in activity by the low-life that stoop to these depths.

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Government consider printing more money

Alistair Darling is considering printing more money in an attempt to ease the credit crunch.There is a distinct possibility that the Chancellor and Mervyn King, the Governor of the Bank of England, may try expanding the money supply by billions. The prime aim would be make these funds available to the government to boost the economy.

So this is Gordon's get-out clause then - he can promise to spend billions but may have to devalue the pound in the process and even print the billions he is promising the spend... not quite the brave new Gordon who flew to Europe to persuade everyone to jump on his heroic spending bandwagon.

The real fear is the danger of deflation, NOT a major concern for those who are shopping for bargains if course.. and the decreasing interest rate is plainly having little effect on the economy. In fact the separation between the Bank of England and government has become blurred over the last 18 months far more so than at any time since official government constraints on the BoE were lifted, allowing it to effectively set it's own rates.

There may be uncertainty about the economy and the effectiveness of the interest rate cuts, but there are some certainties about printing money which you can 'take to the bank'.

• Inflation is certain and with increasing unemployment, this is NOT a welcome side-effect.
• Massive and instant devaluation in the pound is likely, making imports hugely expensive - those companies whose business relies on imports are likely to be hit very hard.

Whatever the uncertainties might be, the effects that we know about should make this a non-starter even though the government are being quoted as suggesting that this is a 'sensible contingency..'. I think we have already demonstrated that government actually has very little grip on the economy, and a measure like this could easily send things spiraling out of control. I heard only today that Zimbabwe has had to start printing Trillion dollar notes such is the extent of their inflation...

Don't forget that this idea is from the man who claimed the recession would be a shallow one, this is the man we are trusting with our fragile economy. Apparently he no longer things the recession will be over in 6 months... frankly Alistair Darling, nobody with an IQ of higher than 6 believed you anyway... whether that covers a percentage of the ruling party I just cannot say.

This does however put to bed those rumours about the government taking the opportunity of parity with the Euro, to adopt the European currency... If you are part of a pan-European currency, you won't be allowed to just print your own money to arrest deflation...

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Drop in interest rates today

New Rate: 1.5%
As expected the Bank of England announced another drop in base rates to day, taking the rate down to it's lowest ever level at 1.5%. This represents a drop of 3.5% since the beginning of October when base rate was at 5%.
Naturally this will be good news for some householders with tracker mortgages and not so good for those that were enjoying 5% return on their savings 12 months ago. When you take into consideration the global economic climate, a drop in mortgage rate will not compensate for the thousands who will find themselves out of work in the next few months. The hope that these measures will magically stimulate the economy could still be a forlorn one and there is still likely to be another cut in two months time which could well see the rate drop to or below 1%.

Further reading..
interest rate news
can interest go negative?
drop in base rate
UK heads for recession