[Archived] Global Recession Looming

[Bazzanotsogreat]

Wall Street Rumbles, Is a Recession Looming?

Looks like we are entering a period of global economic uncertainty with stock market values tumbling, high oil prices and rising levels of inflation. Mervin king (Bank of England) gave a speech tonight saying that the next year is going to be really tough and not just for business but for the average person.

It seems we in the UK could be faced with a situation were we see a sharp rise in unemployment/ redundancy the cost of living index increasing more rapidly that it has for ages , but without the relief of interest cuts ( due to the lack of elasticity in the UK economy) .

It seems that the 30 billion that the government has ploughed in the ludicrous Northern rock saga will backfire on them. That money could have been used to cushion such economic turmoil instead of burdening us taxpayers.

Anyway conspiracy theorists believe that the stock market tumble is down to approaching apocalspy that is asteroid TU 24 (oops) that will crash into the earth at the weekend

[broadsword]

UB42 or UB40???

[Flopsy]

we'll only enter a reccession if everyone runs round screaming "We're going into recession" its likely that we'll have a reduction in growth, but if people hold their nerves then we'll probably be alright.

Or we could run round screaming "We're all doomed", what ever makes you feel better really. Me? Im going to carry on laughing at Newcastle. Cheers me up no end

[stuwilky]

It seems that the 30 billion that the government has ploughed in the ludicrous Northern rock saga will backfire on them. That money could have been used to cushion such economic turmoil instead of burdening us taxpayers.

How would the £25bn have that effect bazzanotsogreat?

[Flopsy]

(he doesnt know but its a good way of beating the Government over the head with - anyway I thought it was closer to 50bn and anyway let the bank collapse have all those people have their mortgages revoked and savings lost - that will help confidence)

[stuwilky]

(he doesnt know but its a good way of beating the Government over the head with - anyway I thought it was closer to 50bn and anyway let the bank collapse have all those people have their mortgages revoked and savings lost - that will help confidence)

With the urmost respect Floppy, surely that is not for you to comment?

[Bazzanotsogreat]

How would the £25bn have that effect bazzanotsogreat?

The 30 billion that has been taken out of the UK economy to prop up a failed bank. That 30 billion could have instead been given to the bank of England more flexibility to reduce interest rates, which would help with the spiralling inflation & credit costs.

[Bazzanotsogreat]

(he doesnt know but its a good way of beating the Government over the head with - anyway I thought it was closer to 50bn and anyway let the bank collapse have all those people have their mortgages revoked and savings lost - that will help confidence)

I always believed that a capitalist system employed a “laissez faire” attitude toward the economy not an interventionist model as we have seen in France.

The Northern rock debacle is only part of the problem, all I know is that almost every financial expert is against the notion that the taxpayer is having to fork out huge sums to bail out a failed company a company that will be nationlised nor totaly private, so that Mr Branson can come-along and buy for a hundredth of its true value.

Flopsy if you are happy with around 25% of your annual tax been spent on a failed company that is your Prerogative

[Flopsy]

you're right its a cock up, but I also understand why the government did it - if they let Northern Rock go to the wall at the time, a lot of home owners would have been in deep crap through no fault of their own - that is how I see it. And Laissez Faire is only workable if there is no regulation, and sometimes the government has to act, like the US government props up businesses and banks, because they have to for the "national good".

Look at it another way - proping up Northern Rock has probably prevented runs on a number of other banks, which would have caused more trouble to the economy and the taxpayer than 25 billion.

As you'll know more about it than me and I cant be arsed to look, how much was that financial package the central banks put into the system a few weeks ago?

[Bazzanotsogreat]

you're right its a cock up, but I also understand why the government did it - if they let Northern Rock go to the wall at the time, a lot of home owners would have been in deep crap through no fault of their own - that is how I see it. And Laissez Faire is only workable if there is no regulation, and sometimes the government has to act, like the US government props up businesses and banks, because they have to for the "national good".

Look at it another way - proping up Northern Rock has probably prevented runs on a number of other banks, which would have caused more trouble to the economy and the taxpayer than 25 billion.

As you'll know more about it than me and I cant be arsed to look, how much was that financial package the central banks put into the system a few weeks ago?

Flopsy- I don’t wish to engage in a debate on the northern rock crises, the main point of my first post was to point out the current global economic turbulences. The northern rock remark was a “throwaway” comment that came in response to Mr king stating the UK economy couldn’t handle mass interest rate cuts, like the fed in the US has just announced. Not only does the NR situation set a bad president to other companies but that money could seriously have been done with in the upcoming year.

As for your last comment, I haven’t professed that I know any more than you or anyone else .I just thought that this topic is surely worth discussion as it affects all of us at macro & micro levels.

[stuwilky]

The 30 billion that has been taken out of the UK economy to prop up a failed bank. That 30 billion could have instead been given to the bank of England more flexibility to reduce interest rates, which would help with the spiralling inflation & credit costs.

Are the government able to manipulate interest rates in such a way these days?

[Bazzanotsogreat]

Are the government able to manipulate interest rates in such a way these days?

No but the Bank of England are

[stuwilky]

No but the Bank of England are

I know.

But are they not independent of the government these days, what could the government do with the £25m bond to influence interest rates?

I'm off to bed now, but Id like a reputable opinion on it, perhaps given the closeness of it we might have to wait for the broadsheets tomorrow, but the UK economy is a highly complex subject I think better explained by a professional rather than you or I

[philipl]

Probably going to get shot to pieces for this but...

Brown in 1997 set up a banking regulatory system at the same time as he gave the Bank of England its independent responsibility to set interest rates .

The target was to achieve 2% inflation or less and to manage the country's finances within the golden rule which basically meant that over an economic cycle of roughly five years the Government balanced its books- borrowing in poor growth years, repaying in strong growth years.

This worked better than anyone dared hope because the UK banking and government finances got a massive vote of confidence as there was a clearly strong handle on inflation free from Government interference for the very first time in the UK. Everybody could now believe in the inflation forecast and through that the Government finances had to be controlled and suddenly the UK looked in great shape.

Government also benefitted from being very slow in its first term of office to do much by way of spending on its social schemes so the Golden Rule was achieved. In fact repayments were exceded as strong economic growth generated tax revenues ahead of plan.

In the second term of the Government, social spending accelerated plus military expenditure went berserk post 9/11 as well. Unfortunately, this State spending has not yielded solid results in terms of improved productivities or outcomes to anything like the extents desired in local government, health, education, social services or law and order but simply proved to be a massive drag on the economy. As a social liberal who believes in social expenditure, the failure to devise a system which drives 5% per annum improvements in effective delivery of social expenditure in line with the productivity gains typically delivered by private enterprise is a huge disappointment and this Labour Government has failed massively on its core project.

At the same time over the past few years, the housing market whilst not at the stupid excesses of the 1980s certainly heated up. Britain's pre-eminence in global financial markets gave a massive stimulus to the banking sector and much of the south-east with London overtaking New York on many measures to become the number one banking and financial centre of the world.

Housing and innovative de-regulated financial instruments went hand-in-hand to create the Northern Rock fiasco where a demutualised building society saw the opprtunity to grow dramatically using sexy instruments to fund an ultra cheap raft of mortgage products. Not surprisingly when the first ructions of sub-prime hit in the USA, Northern Rock found itself with a lot of problems funding its mortgages with products not designed to cope with a housing market going into reverse or intra-bank lending stopping dead.

The three headed regulatory system of banking Brown had created proved to be an inadequate system of checks and balances as all passed the buck with the lead being taken by the Govenor of the Bank of England who was overly concerned about "moral hazzard" ie if Government steps in and bails the naughty boys out, they will be even naughtier next time. NorthernRock was effectively bust a long time before the queues formed outside their offices withdrawing life savings and an earlier relatively simple behind the scenes forced merger with Lloyds TSB using about £5bn of Government guarrantees was a workable solution but missed through complacency and ignorance of the severity of the problem.

As a result Northern Rock went tits up and we now have £50bn of public money propping it up one way or another. Personally, I'd nationalise it but I think we are going to get Branson picking it up using Chinese sovereign funds (ie Chinese Government money). As Vince Cable puts it, Brown will have nationalised the losses and risks and privatised the gains to be made when the system recovers.

£50bn could build a complete high speed rail network for the UK and any number of other highly desirable projects. It could also have rescued Rover and put in enough cash to make it bigger than Toyota or enabled us to buy the whole of Airbus and relocate all production to the UK!

Back to the economy and I have to say it looks grim. Never mind debates about the global peak-oil point, the UK is now a post-oil economy and very exposed to global oil and gas prices. House prices in the UK are a higher multiple of earnings than the USA by 50% and if the globalisation of mortgage finances forces a global normalisation on earnings multiples, prices have a long way to fall. Hopefully, as UK house prices are not dramatically high by UK standards, the downwards adjustment will not see a repeat of the precipitate fall of the early 1990s.

Massive American banks such as Citi have all but gone bust and are now bailed out by the Singapore, Chinese and Gulf Governments. To a considerable extent the US banks have got the housing pain out of their system but it remains to be seen whether UK banks have come through OK yet. There is probably going to be a sub-prime equivalent bust on credit card debt during 2008 as well in the US and UK banking systems.

This is leaving the UK domestic banking sector very weak and illiquid just at the time that Government has run out of space to move. The massive expansion of the UK public sector combined with Brown now breaking his golden rule as Government debt spirals out of control means there is no scope for good old Keynsian stimuli like Bush is engaging in (tax rebate cheques for everybody in the US). The open UK economy's exposure to imported inflation through oil and other commodities (particularly food) plus the rapidly devaluing pound means that the opportunity to slash interest rates doesn't exist either if all the good work on creating belief in the independent Bank of England controlling inflation is not to be destroyed. That at least is one Brown achievement I believe he is not going to destroy but it might be the only one.

So the prognosis in the UK is uniquely grim.

Grounds for optimism are basically threefold-

1) Thus far the Governments of Singapore, the Gulf and China are acting with huge responsibility and little of the schadenfreude they might have indulged in. The UK is extremely open so I think it is reasonable to hope that a disproportionate amount of their investment will come into the UK particularly as the devalued pound will make it look good value. The moves by Indian companies to buy into the UK are extremely encouraging as well eg Tata buying Jaguar/Land Rover. As well as getting a massive Government underwritten deal on Northern Rock, I would hope that Brown comes away from Beijing with the international operations of the Bank of China being located in London.

2) The EU is actually a bedrock of probity particularly in the hands of Jean Claude Trichet at the European Central Bank who is the only major central banker left with his reputation intact. The EU is by far our largest trading partner (over 70% now) and they will have the strongest mature economy in 2008 as they will be far less affected by the housing market and credit card catastrophes having been less exhuberant in the first place. The UK is already pretty well set-up for a further major realignment towards Europe which will be needed to ward off the worst of the economic crisis.

3) The internationally-open labour market which has served the UK so well in growth times should also serve us well in bad times. Speaking English- the global business and technical language makes Brits amongst the best emigrators whilst a slowdown cutting jobs availability would simply reduce the suck effect on labour from Eastern Europe (the job ads from UK companies in the papers over there are still impressively lengthy). Also, we are four years on from the accession of Poland et al and their economies are beginning to generate a lot of well-paid jobs whilst many in the first wave of workers to come to the UK are bound to be thinking about going home having saved enough to make a big difference to their lives. So I think high levels of UK unemployment will be avoided by economic migration effects.

[Flopsy]

I know I'm probably being quite naive, but surely the government could help with the fuel bills, by knocking 5p/10p off fuel duty? the tax revenue lost through that would most likely be gained through better economic performace / lower prices elsewhere.

And as for the environmental cost, as far as I can see that fuel duty doesnt work to reduce travel, therefore a different taxation option - road charging - should be investigated more competantly.

I have to say PMQ's was fun this afternoon. Brown and Cameron really dont like each other and Brown is squirming and avoiding answering the most simple of questions.

[Ozz]

People posting on message boards phrases like Global Recession Looming-Time to watch those pennies tend to add to the self-fulfilling phrophecy that recession can be, much like the Mail headlines of a similar note do.

[Paul]

Thank you philip I enjoyed that post.

I run a small business and have to say the view in our company is we are extremely p1ssed off with Wall Street, LSE et al and the financial experts who have spent the whole of 2008 telling us how bad it is going to be. Basically these people have no balls. In fact 2007 wasn't even finished before they started. Yes some retailers have had a bad time at Christmas. Guess what guys? You stocked the wrong product.

I supply non-esential, thankfully very low value, product to the retail sector. Typically my product retails for £2.99 and I'm mightily relieved we do not supply big ticket items which may have a hard time. Within in our business we intend to make 2008 as successful as every one of the last 15 and stick two fingers up to the experts. I firmly believe we are in greater danger of talking ourselves into recession than there is the likelihood we will enter anything other a technical recession.

The major threat I see is my customers will read the word "RECESSION" in big headlines, see this as a reason to stop buying and as sure as eggs are eggs when retailers reduce their stocks the public reduce their purchases. The real danger is in the words the experts are using, and I often wonder what their motivation is - cheap shares by any chance?

[Flopsy]

you're not looking for 29 year old highly qualified and educated people are you? (he asks keeping his options open )

[Bazzanotsogreat]

People posting on message boards phrases like Global Recession Looming-Time to watch those pennies tend to add to the self-fulfilling phrophecy that recession can be, much like the Mail headlines of a similar note do.

Not realy ,if there is a global recession it will have more to do with:

The rising cost of fuels

Tensions in the Middle East, Opec not producing enough Oil to quench demand.

China and the US deliberately undervaluing there currency.

Surplus wealth in certain Asian and Gulf states economies.

Continued low levels of low productivity in the UK economy

The collapse of the sub-prime lending market

The continuation of the credit and housing bubble burst into 2009 (US)

The downside risks to many growth stocks versus upside opportunity have reversed to the downside.

Rising levels of national debt, spiralling levels of personal debt and higher than expected inflation (both core and headline)

[den]

You know someone Flopsy?

[Flopsy]

possibly

this person makes demon cups of tea and can photocopy like a legend

[den]

Dave Birch?

[Paul]

you're not looking for 29 year old highly qualified and educated people are you? (he asks keeping his options open )

Fraid not Flops but better you than someone who just picks up on the latest buzz word.

[Flopsy]

yeah, as long as you over look the amount of time I spend on the internet - its research m'lud

[Ray-Von]

Sort of "on topic" - my two year fixed mortgage deal has just finished and on the hunt for a new deal. I did prefer the security of another fixed rate deal (most seem to be in the 5.5 to 6% bracket) but the mortgage broker I am using says I should seriously consider a tracker deal as he feels that interest rates will be falling over the next year/18 months.

Any financial gurus who could assist on this front?