Mervyn faces the Music

The Governor and his colleagues faced the press yesterday at the launch of the quarterly inflation report .... here is a selection of comments from them from questions fired from economics journalists, there is some great evaluation in here for AS and A2 economics students!

Things can only get better …..

We asked a thousand people and most of them said ...... there is trouble ahead!  Consumer confidence took a further nose-dive last month according to fresh data from the Nationwide Building Society. The main reason was another steep decline in the percentage of people reported as saying that the UK economy is in good shape. This is just one survey among many, and its limited longevity doesn’t give it much of a record in anticipating turning points in the economic cycle. But if the housing market presages a wider economic downturn, it might well be one of the survey indicators to watch carefully because the shift in sentiment does not appear to have benign causes. Sixty per cent of those surveyed say that now is a bad time to make a major purchase such as a house or a new car – almost twice the number compared to two years ago.

Stabilising demand - will the tax rebate work?

It is an interesting case study in how to stabilise demand and output at a time when consumer confidence is declining and the domestic economy has been hit by a sharp negative shock emanating from the housing market. The fiscal rebates will soon be landing in the post boxes of millions of US households ... the key question is how much of a temporary stimulus will this provide for the economy? The Financial Times has a good article on this today.

“The difference depends on how much of the rebate package will be spent and how much will go on imported goods. It is also related to the time-frame over which it is spent, and whether this expenditure will, in turn, trigger knock-on spending ..... In effect the government will nationalise part of US household debt – socialising some of the costs of the economic downturn. In doing so it may reduce the risk of a sudden pull-back in spending by overstretched consumers, even if it does not actually boost spending by much. Analysts estimate anywhere from 20 per cent to 50 per cent of the rebates will be spent over a period of four to six months.”

The impact will depend on the marginal propensity to save and spend the extra income and also the marginal propensity to import goods and services. With a weaker dollar raising the prices imported products, perhaps the propensity to import might be a little lower at this key stage of the economic cycle? The tax rebate is also targeted at Americans on incomes below the top of the pay ladder - whose marginal propensity to spend might be expected to be higher than the super-rich.

According to ABC news:

“More than 130 million U.S. households are eligible for the checks. Individuals could get up to $600, couples up to $1,200 with an additional $300 per child. In total about $120 billion will be doled out over the next two months.”

The rest of the FT article is here

US economy awaits stimulation from Bush’s tax rebate (Guardian)

Revision: Recessions

“What’s the difference between a recession and a depression? A recession is when your neighbour loses their job; a depression is when you lose yours.”

Chart of the Day: Nationwide Consumer Confidence Index

First published in May 2004, the Nationwide Building Society’s consumer confidence index is a recent addition to the phalanx of indices seeking to track changes in household sentiment and give us a lead indicator of where the economic cycle might be heading. 1,000 adults are interviewed each month, in a survey that is the closest we get in the UK to the Conference Board surveys published in the United States,The Index is based on responses to 5 questions included in the survey:

People’s appraisal of current economic conditions
People’s expectations regarding economic conditions six months hence
People’s appraisal of the current employment conditions
People’s expectations regarding employment conditions six months hence
People’s expectations regarding their total family income six months hence

The latest figures were released today and show the weakest confidence since the survey was launched, evidence perhaps that the gloomier economic headlines dominating the papers and TV news coverage in recent days and weeks is starting to show through. Looking a little at the detail within the survey, it seems that people’s expectations for the economy in six months time are improving slightly, but on balance those surveyed still expect house prices to rise during 2008. Perhaps the news on property prices from the last few days will change this perception in the May survey?

Economic Resilience?

Gordon Brown and his Chancellor, Alistair Darling, have been keen to stress that the economy is ready to weather any storm that hits it. Although the economy remains standing, despite recent turbulence in the financial markets, it does seem like tempting fate to claim that the economy is so resilient, and capable of withstanding any disturbances that might come along. So what supports their statements, and what are the risks to the economy? This post looks at a few of the problems on the horizon.

Chart of the Day: Falling UK House Prices

No surprises for our choice of chart of the day!

House prices have seen their biggest monthly drop since the 1990s recession, according to Halifax Bank of Scotland - the UK’s biggest mortgage lender. Let us include the usual caveat that you should never read too much into one month of data - but it seems to me that virtually of the housing market indicators including many of the forward-looking confidence surveys from households, estate agents and construction companies are pointing to a hefty downturn in house prices and activity in the market over the coming months whatever the soothing comments of the housing market economists from the leading banks and mortgage lenders. From a personal perspective, I am happy for property prices to decline for a couple of years having been out of the market for some little while. It probably won’t be a rout whatever the Daily Mail and Daily Express might suggest on their front pages. But the property boom is most definitely over for now and a dampening of the ardor for bricks and mortar as almost the sole route to greater wealth is, in my opinion, no bad thing at all.

PowerPoint Charts
House_Price_Inflation.ppt

Chart of the Day: Construction Sector Confidence

Last week we had lots of coverage and comment on the retreat from mortgage lending by many of the UK’s biggest home finance providers. The essence of the problem is that the lenders are just not as willing to offer loans to people as they were. Profit margins have been squeezed as the wholesale cost of money has risen, and some mortgage providers have effectively left the market for the time being. This is making life very difficult for people needing to get a first-time loan or looking to renew their mortgage deals when fixed rate agreements reach an end.

The result is a sharp fall in the number of property transactions that are falling through because of problems in finding the required level of funding.

Chart of the Day: Consumer Credit

Interest rates on unsecured credit are up to five times the base rate of interest set by the Bank of England. And consumer confidence is dipping sharply as the economy heads into a slowdown. But that doesnt seem to be stopping UK consumers from piling on the debt onto their credit cards. New figures show that personal borrowing in Britain soared by its highest amount in more than five years in the year to February 2008. The level of new consumer credit surged by nearly £2.4 billion in February with unsecured borrowing growing by £1.6 billion. An act of irrational desperation? Or an inevitable and necessary move when other supplies of credit dry up? Re-mortgaging is become more expensive and less easy to arrange forcing consumers who want to live on the never-never to find fresh sources of funds. It seems crazy to me that people are prepared to do this, why not rein in spending at this time and save some more for the tougher times ahead? Perhaps most people dont expect a recession - or dont think that it will hit them directly?

PowerPoint chart
Consumer_Credit.ppt

US Recession Watch: Hold onto your Hats!

The latest Standard & Poor’s/Case-Schiller house price index shows the biggest year-on-year decline in real estate prices for 21 years. Hold onto your hats - US Treasury Secretary Henry Paulson has come out with some very bearish statements on where the US housing market will head before the worst is over.