Panic in the markets...and bad news from the UK economy

Continued focus this morning on the financial markets following the failure of the US Congress to agree the financial rescue package. Tutor2u highlights some of the reaction and the detailed press coverage (all worth a read!).

Alongside this, almost unnoticed, further bad news about the UK economy which saw no growth in the second quarter of 2008, while the gap in the current account widened to its highest level in almost a year. Data from the Office for National Statistics (ONS) showed economic output remained the same as in the first quarter, confirming previous estimates. Growth was 0% in the second quarter - which was even lower than the 0.3% figure for the first quarter of 2008. Separately, balance of payments information showed there was a deficit of some £11bn in the current account in the second quarter. The current account deficit - which is the difference between imports and exports - widened by more than had been expected to £10.98bn, compared with £5.49bn in the first quarter. This is the biggest the deficit has been since the third quarter of 2007 and it equates to 3% of GDP. (Link: UK confirms economy at standstill )

This added to the news yesterday that new mortgage lending collapsed in August, according to the latest figures from the Bank of England. Banks and building societies lent an extra £143m in home loans last month, just 5% of July's lending figure and only 2% of the lending in August 2007. August is traditionally the quietest month for house sales. But house buyers may have been put off buying properties because of the continued fall in prices and widespread predictions of an imminent recession. (Link: Mortgage lending slumps)
The fall in house prices has accelerated in England and Wales, according to the Land Registry. Its latest report shows that prices fell by 1.9% in August, taking the annual rate of price deflation to 4.6%. (Link: House price fall 'accelerating')

All of this raises interesting questions about how we behave when we think there is going to be a recession. What will be the effect on growth if we decide to postpone consumption? What would we expect to happen to the balance of payments if we enter a recession? Why has there been an increase in the current account deficit at a time when the economy is slowing down? Will this news encourage the Monetary Policy Committe to lower interest rates?

Britain still attractive to foreign investors

The Guardian highlights the fact that Britain attracted the most foreign direct investment (FDI) in Europe in 2007 according to the United Nations, but the financial turmoil in the global markets will have a detrimental effect on investment next year. In its annual World Investment Report, the UN Conference on Trade and Development (Unctad) said that the UK was the number one destination for inward investment in Europe in 2007, attracting more than $1tn (£540bn). Globally, the UK was second only to the US. The main reason for the growth appears to be the increase in merger and acquisition activity. (Link to article)

What impact does increased investment have on the economy? Does it matter that this increased investoment comes from overseas?

Bad news for Ireland and New Zealand

With all attention on the UK and US economies at the moment it is easy to ignore developments elsewhere. It is reported thet the Irish Republic's economy has fallen into recession after shrinking for a second quarter in succession. The Central Statistics Office (CSO) said gross domestic product (GDP) had contracted by 0.5% in the three months to the end of June. The economy had shrunk by 0.3% in the first quarter of the year. It is the first time Ireland has experienced a recession since 1983. The economy is now facing its most difficult period since high unemployment and emigration hit in the early 1980s.

The New Zealand statistics agency says the economy has gone into recession for the first time since 1998. Gross domestic product shrank 0.3% in the first quarter, and 0.2% in the second quarter this year. But annual growth until June remained positive. New Zealand is suffering from the global credit crunch, rising food and fuel prices, and drought which cut production in agricultural industries.

Links: Irish economy goes into recession

New Zealand slips into recession

What is the technical definition of a recession? What key features characterise a rescession?

The financial crisis - is it nearly over?

As uncertainty about the effects and details of the financial rescue plans continue to affect world share markets (Shares slide amis bail out fears), Geoff Riley provides a good reflective piece on the tutor2u blog. In his view 'We shouldn’t for a moment think that the worst is over. My fear is that the UK economy and the UK government remains vulnerable to a fresh wave of negative speculation as the markets test the British government’s resolve to protect our leading financial institutions. ' He also provides some excllent links to articles that explain what has been happening and possible implications. I particularly like the piece by Roger Bootle in the Daily Telegraph where he focuses on the financial crisis to highlight the limits of the free market - well worth a read. Link to Geoff Riley's piece

Inflation up to 4.7% - another letter!

The annual rate of UK inflation rose to 4.7% in August from 4.4% the month before, a higher-than-expected jump. Inflation as measured by the Retail Prices Index (RPI) - often used in pay negotiations - fell to 4.8% from 5%. The biggest contributor to this rise was the increase in energy prices which outweighed a number of prices falls. For the third time the Governor of the Bank of England, Mervyn King, was forced to write a letter to the Chancellor explaining why the inflation target had not been met. The BBC site as a nice video feature looking at the content of the Governor's letter. (Link)

Lloyds TSB takeover of HBOS

The Lloyds TSB-HBOS proposed takeover highlights a number of the issues we have been focusing on during the first few sessions of the A2 course.

• The vulnerability of firms once their share price comes under pressure from the markets
• The impact of a merger/takeover on the vulnerable company (Will the Chief Executive of HBOS survive? How many jobs will be lost? How will the business be rationalised?)
• The economies of scale that can be exploited by the new business (“..significant cost savings can be made…”) Will some of these be passed on to customers?
• What impact will it have on competition in the banking market? The government is likely to relax the competition rules even though “…the enlarged group will hold a third of the UK mortgage market”.

Links:
Black Horse becomes White Knight - good graphic showing decline in HBOS share price price
Lloyds TSB unveils HBOS takeover
Profile: Lloyds TSB and HBOS

Still concerns about 'stagflation'.

The CBI has become the latest organisation to predict that the UK will fall into recession this year. The business group estimates that the economy will shrink by 0.2% between July and September, and then by a further 0.1% from October to December. Its report follows similar warnings from the European Commission and the British Chambers of Commerce. An economy is generally considered to be in recession after two successive quarters of declining output. (Link)

The Governor of the Bank of England has warned MPs that inflation, now at 4.4%, is set to exceed targets once again. Mervyn King said "it would not be surprising" if he had to write to the chancellor next week explaining why inflation had exceeded targets of 2%. He added all advanced economies were facing "testing times", but he saw no reason why the UK could not cope. However, Mr King also warned there was no quick fix for the current mortgage crisis affecting the economy. (Link to article and Video clip)

Manufacturing output and house sales down

UK manufacturing output declined for a fifth straight month in July, official figures showed, underscoring the weak state of the UK economy. The Office for National Statistics said that manufacturing fell by 0.2% between June and July, more than the 0.1% analysts had expected. Economists said that the figures were further evidence that the UK economy was likely to enter a recession. (BBC link)

The slump in the UK property market continued in August, with some estate agents selling fewer than one home per week in the past three months. The Royal Institution of Chartered Surveyors (Rics) said sales were at their lowest level since its monthly survey started in 1978. It said the fall in prices slowed, for the fourth month in a row, but they were still much lower than a year ago. Rics said the continued shortage of mortgage funds was "stifling" buyers. (BBC Link)

How do people experience inflation?

The BBC reports that food prices in UK supermarkets and shops have risen by 8.3% since January. Meat and fish - up 22.9% - registered the biggest price increases for any one category in the survey, with fresh fruit and vegetables up 14.7%. Retail analysts Verdict Research also found price rises of nearly 50% for some individual food items. The figures come amid growing concern about the high cost of food, which is exceeding the official inflation rate. On Wednesday, the British Retail Consortium (BRC) said that food price inflation over the past year amounted to 10% - more than twice the official Consumer Prices Index (CPI) inflation rate of 4.4%. Other research has shown that prices of many other items (e.g. energy) have risen by significantly more than the headline rate of inflation. Link to BBC report