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Economy on rocks as credit crunch worsens
Evening Standard 28 Aug 2008
PROPERTY
Where we've got to
A year ago, just before the downfall of Northern Rock, not even the most pessimistic of economists could have foreseen the shattered landscape that is the UK property market.
Prices are falling even faster than in the early Nineties crash and the number of mortgages approved has suffered an unprecedented two-thirds collapse. Halifax said this week it is to close
53 of its estate agency branches with the loss of at least 100 jobs. Construction has virtually ceased and housebuilders such as Taylor Wimpey are laying off tens of thousands of workers.
Looking ahead
Gloomier analysts predict that prices will fall 35 per cent before they hit bottom in early 2011. More upbeat forecasters think the residential property market recovery could begin as quickly as late 2009 as the Bank of England slashes interest rates. But in the construction industry it is difficult to find any glimmer of hope.
COST OF LIVING
Where we've got to
Almost all the unavoidable expenses of life - from petrol to home loans to a pint of milk - have risen sharply over the past year. The official rate of inflation, the Consumer Prices Index, stands at a 16-year high of 4.4 per cent.
But food inflation is more than 12 per cent, while energy bills are going up at more than 16 per cent, a figure that is sure to accelerate.
Research out this week suggests average households are now £2,500 a year worse off than 12 months ago after paying for essentials.
Disposable income is down from £17,000 to £14,250, according to website uSwitch.
Looking ahead
The official measure of the cost of living is expected to carry on rising through autumn, peaking at around five per cent - more than double the two per cent target - towards the end of the year.
With oil prices now well below their peaks of close to $150 a barrel, the worst of the inflation crisis could be over by then.
Analysts at Capital Economics said inflation would fall to below the two per cent target next year, allowing the Bank of England to make deep cuts in interest rates, further easing the pressure on household budgets.
They added that the base rate could fall to 3.5 per cent by the end of next year.
THE CITY
Where we've got to
The banking industry is in a state of nervous exhaustion after a year of the credit crunch, which has lasted far longer than anyone expected when Northern Rock went cap in hand to the Bank of England.
Only now is the company starting to get a clear idea of how bad its losses in the US sub-prime mortgage market have been. It is also starting to see debts from British customers soar.
British banks have written off £15 billion this year and Royal Bank of Scotland made a £691million loss in the first half. The FTSE-100 index is 10 per cent lower than a year ago.
Looking ahead
Autumn is by tradition a nervous, difficult time for the City when many stock market collapses have taken place. Nerves were not soothed this week when Peter Hargreaves, head of investment management group Hargreaves Lansdown, said the FTSE-100 could fall below 5,000 by the end of the year.
City bonuses are forecast to be 40 per cent down on last year, totalling around £5bn. Many hedge funds are expected to go to the wall after big losses in the first half of the year.
THE ECONOMY
Where we've got to
The £1.4trillion juggernaut that is the British economy has juddered to a standstill. Official figures confirmed last week that GDP did not grow at all in the second quarter of the year.
Will it start rolling backwards or begin inching forward at the end of the year? The omens are not good and getting worse. This month Bank of England Governor Mervyn King warned "it is bound to be the case that there will be a quarter or two or negative growth" for the first time since the early Nineties.
This week fund manager Peter Hargreaves said we could face six quarters of negative growth. Unemployment is also rising, with 60,000 more jobless in June than in March. There are now 1.67million in the dole queue.
Looking ahead
Economists have been scrambling to revise their predictions with each wave of gloomy news. Today Capital Economics lowered its forecast for growth this year from 1.7 per cent to 1.2 per cent and for 2009 from 0.5 per cent to a 0.2 per cent contraction.
Not everyone is gloomy. Ben Read of forecasters CEBR said: "We could see the first shoots of recovery in the second half of next year."
He is predicting growth of about 12 per cent in 2009 - still sluggish but better than a full recession.
THE HIGH STREET
Where we've got to
The High Street has borne the brunt of the reduction in consumers' disposable income.
Shoppers are also much less willing to spend what they do have because of fears about the falling value of their homes, their levels of debt and job security.
Retail sales have gone down in four out of the past five months and the first high street casualties have fallen into administration.
Supermarkets are losing market share to the fast-growing discount grocers such as Lidl and Aldi. Upmarket organic superstore Whole Foods Market has found the going much tougher than expected - even in Kensington.
Looking ahead
Few retailers are looking forward with anything other than anxious trepidation to the credit-crunch Christmas.
Experts say many chains will do well to match last year's sales, while their costs have soared over the past 12 months.
Richard Dodd of the British Retail Consortium said: "It is obviously going to be a very, very tough Christmas. Last year sales grew only 0.3 per cent like-for-like and conditions are certainly no better now."
Tim Danaher, editor of Retail Week magazine, said: "There is no light at the end of the tunnel. What light there is is coming from the oncoming train."
