IT may go down in history as The Week the Lights Went Out. Plunging mortgage lending, crumbling business confidence, soaring oil and inflation, serial collapses in the housebuilding sector and a quarter of the stock market value of the high street icon Marks & Spencer wiped out in a trice: the news flow has been dire.
Taylor Wimpey, one of the biggest names in housebuilding, saw its shares crash 41 per cent yesterday on news that a £500 million re-financing deal with its banks had fallen through, putting it in breach of its banking covenants.
Other top-name builders, such as Persimmon, have also been struck down as the mortgage famine and slump in confidence deepen the crisis in the building sector. Shares in Barratt have collapsed over 95 per cent.
Confidence – that magical lubricant that drives every business and every spending decision – is on the skids.
Yesterday Sir Stewart Rose, the M&S chairman, warned of "stormy times ahead". Charles Bean, the deputy Governor of the Bank of England, said yesterday that we face a year or more of lower living standards as a result of the soaring world oil price.
Problems have been building for months. And they form part of a bigger and altogether more troubling picture of what has gone wrong in the global economy and what lies in store.
The scale of the collapse in the value of bank credit paper has intensified as soaring oil has put paid to the prospect of an economic recovery powered by further cuts in interest rates.
Sales of "big ticket" items are already tumbling as household confidence has slumped to within a whisker of its record low in March 1990 – just ahead of the plunge into a deep recession.
For many, the combination of appalling economic data but apparent "business as normal" is creating an increasingly unreal, spooky atmosphere in the high streets and shopping centres.
Shares are crashing and the confidence indicators look terrible. The sky is filling with black smoke. But where's the fire? House prices are falling – but with some areas less severely hit than others.
For homeowners insisting that the credit crunch has not really hit in their areas, it is like dining at a restaurant while the noise of a violent demolition next door starts to intrude. The floor vibrates and dust starts to fall from the ceiling. What's the problem behind that wall? Why is the noise getting louder?
How much "louder" it will get depends on whether we are in a conventional business cycle or a super cycle – an epochal de-leveraging that could unleash the most savage recession since the Second World War.
Both the Bank for International Settlements and the International Monetary Fund have warned in the past week that the global economy is at a "tipping point". Both used this worrying expression in their recent assessments of the global economic outlook. In its annual report, the BIS says the financial market turmoil is "without precedent in the post-war world".
It adds: "With a significant risk of recession in the US, compounded by sharply rising inflation in many countries, fears are growing that the global economy might be at some kind of tipping point. These fears are not groundless."
So what's happening? The credit crunch that struck last autumn has triggered a massive de-leveraging through the Western world's financial system, creating the equivalent of a credit black hole. The BIS is clear as to the cause of this crisis. In stark and outspoken language, it declares "loans of increasingly poor quality have been made and then sold to the gullible and greedy, the latter often relying on leverage and short-term funding to further increase their profits".
The credit contraction, combined with soaring oil and rising inflation, is now forcing a ferocious slowdown across the world's major economies.
We are not alone. But with the government facing a shortfall in revenues and no slack for tax cuts, and the Bank of England forced to keep interest rates up to counter inflation, it feels as if we have been left on our own.
Is there an upside, and what is it? So far employment has held up well. Even if, as the OECD warns, unemployment rises by 100,000 we are well short of the 2.8 million total reached in 1993.
Second, a savings recovery will boost bank and building society deposits, making more money available for mortgages in due course. And by 2010 America's economy should be past the worst. It is bad news for now. But the cycle will turn.
Household woes to continue as oil prices surge
Lindsay McIntosh LIVING standards will remain low for at least a year as a result of soaring world oil prices, the new deputy Governor of the Bank of England warned yesterday.
Charlie Bean's dire prediction came as the retail sector reeled from Marks & Spencer's profits warning and share-price plunge, and a leading housebuilder saw its own shares collapse as it axed hundreds of jobs amid a "significant downturn" in business.
Taylor Wimpey is facing an uncertain future after shareholders refused to back a £500 million emergency cash-raising plan – sending shockwaves and panic throughout the construction sector.
Mr Bean, formerly the Bank's chief economist, said that oil prices – already at a record high – might continue to rise for another two years.
Giving evidence to the Commons Treasury Committee, he warned that there was a danger of a pay-price spiral developing if workers tried to compensate by calling for higher-wage settlements. He said: "It certainly poses a significant challenge. There is no doubt about that.
"It may be a relatively unlikely event, but it could be particularly unfortunate if it happened, if households and businesses start losing faith in the idea that inflation will stay low – round about the target – they start building it into their pay and prices and inflation becomes much more embedded into the system."
Echoing recent warnings by the BoE Governor, Mervyn King, and Alistair Darling, the Chancellor, Mr Bean said there was little the Bank or the government could do to prevent the fall-off in living standards.
"It is determined by global factors. As a nation, it means that our living standards will be lower than they would otherwise be," he said.
He said the recent pick-up in inflation should be temporary, provided pay pressures remained subdued and oil prices did not continue to rise inexorably – although he admitted that was "open to debate".
"I don't think one can discount the possibility that oil prices will continue to rise for a while," he said. "I think, in the longer term, there are good arguments for expecting them to come back because there are alternative sources of supply."
Earlier, the chairman designate of the Financial Services Authority, Lord Turner of Ecchinswell, rejected claims that the rise in oil prices was being driven by speculators.
"There is no large accumulation of evidence, I would have thought, that speculation is playing a major role," he told the committee.
He acknowledged, however, that UK financial markets were "not totally clean" and said that the City watchdog needed to take a tougher approach to tackling market abuses.
Meanwhile, the Organisation for Economic Co-operation and Development said that the UK was facing a 100,000 rise in unemployment over the coming two years.
It said joblessness would rise from 5.4 per cent of the workforce in 2007 to 5.8 per cent in 2009, with the total out of work reaching 1.8 million.
Consumers starting to cut back
M&STHE high street favourite's plummeting share price adds weight to mounting concerns over the resilience of the consumer sector to weather the economic storm. Spending figures in the early period of the year surprised analysts with their strength but did little to alleviate overriding worries consumers were reining in spending. The profits warning announced by M&S has provided them with unwanted proof their fears were well-founded. Costs of basics such as food and utilities are rising, forcing consumers to cut back on non-essentials. It is likely that customers are switching from recognised or luxury products to own-name or budget brands. This is certainly the case for food, according to analysts.
Waking up and smelling the coffee
STARBUCKSWHEN cash-strapped consumers are looking for ways to tighten their belts, the £3 morning latte is an obvious casualty. The fall in demand for luxury goods is likely to be a major factor in ubiquitous coffee house Starbucks' plans to close hundreds of its stores across the US. The firm has doubled in size since 2004 and this massive expansion – set against the disastrous US economy – would appear to have hastened its downfall. The closure of 600 stores will see seven per cent of the firm's workforce redundant. American analysts said yesterday that the chain was a victim of its own success – and claimed investors would react positively to the cuts as evidence it was getting its house in order.
Cracks begin to show in construction
TAYLOR WIMPEYFALLING UK house prices have delivered a major body blow to the country's biggest housebuilder. Taylor Wimpey confirmed it was laying off 900 jobs to cope with the downturn. The firm – which was formed from the merger of George Wimpey and Taylor Woodrow last summer – said its house completions fell by a third in the first six months this year, and that it was not expecting any recovery "in the short-term". It said it was closing 13 regional offices and reducing staffing levels after suffering a "sharp" decline in reservations since April. Taylor Wimpey – which had been trying to raise a reported £500 million to help shore up its finances – said it was concentrating on reducing costs and cutting the prices of built homes.
INFLATIONBoth the consumer price index and retail price index have been moving sharply upwards in the last year and are likely to continue to do so in the short-term. This May, CPI hit 3.3, its highest since 1992, and RPI was at 4.3, its highest June 2007.
If prices go up and incomes remain constant, living standards are affected. If higher wages are then demanded to maintain purchasing power, this leads to further inflation.
OIL
The price of oil has significant knock-on effects across the economy and it has been spiralling to more than $140 a barrel. The price hike filters down through numerous markets to impact directly upon consumers' budgets.
It affects those who are paying more to fill up their petrol tanks and those who have utility bills to pay. And it also puts up the cost of doing business. Road hauliers pay more for their fuel, and the resultant higher costs to transport goods are passed on.
BUILDING
The Construction Purchasing Managers' Index plummeted to a new low in June, contracting for four successive months and falling at the fastest rate since the measure was taken.
Although the sector only accounts for about six per cent of UK output, the sharpness of its decline makes it significant.
MORTGAGE APPROVALS
The latest figures for mortgage approvals show they dropped from almost 35,000 in April to less than 30,000 in May – and a decline in mortgage approvals signifies a weak housing market.
This means there are potentially a lot more sellers than buyers and prices are likely to fall – substantially. Analysts argue that a gradual fall is no bad thing but a sharp correction will have knock-on effects for the rest of the economy.
HOUSEHOLD SAVINGS
The household savings ratio is currently at its lowest point since 1959. This means people are living beyond their means. At face value, consumer spending was quite robust in the first quarter of the year, but disposable income fell – so people were financing their spending by cutting back on their savings or even dipping into them. Over the long term, that is not sustainable and people will have to rein in their spending – bad news for the economy.
MANUFACTURING
The Purchasing Managers' Index shows the UK sector has hit its lowest point since the events of 9/11, indicating it is heading for a recession. Output, new orders, work backlogs and employment all fell in June. Manufacturing is a smaller part of the economy than it used to be, but any downturn of this nature is still a bad sign.
CONSUMER CONFIDENCE
Soaring household bills and fears of a looming interest rate hike last month drove consumer confidence to its lowest level since Britain was last facing recession 18 years ago. There is not always a direct link between spending and consumer confidence, so there may be a couple of months when confidence drops but spending remains high.
The full article contains 2144 words and appears in The Scotsman newspaper.
