UK News

Britons face rising price pain

– Fiona Shaikh is Reuters’ Economic Correspondent, based in London. –

Stubbornly high inflation has proved something of an inconvenience for the Bank of England over the last year, but the unrelenting rise in prices is turning out to be a real headache for ordinary Britons — one which is likely to get worse before it gets any better.

Consumer price inflation — the headline measure targeted by the central bank — accelerated to 4 percent last month, the  highest in more than two years and double the BoE’s target.

A great deal of the rise will have been down to the 2-1/2 percentage point rise in value added tax at the start of this year — a one-off move that will drop out of the statistics next year and mechanically bring headline inflation back down again.

But that will come as little comfort to most people at a time when wages are rising at half the rate of prices and energy bills are rising.

Consumer morale is already in the doldrums and the misery is likely to get worse once the government’s public spending cuts kick-in in earnest.

BoE Governor Mervyn King noted last month that Britons have endured the sharpest drop in living standards since the 1920s depression, and the harsh reality is that most people will need to get used to having less as a consequence of a much-needed economic rebalancing.

from MacroScope:

Economists vs the zero barrier

Anyone involved in financial markets on a day-to-day basis will be familiar with bits of jargon like “breaking the psychological barrier”, “passing key resistance levels,” and even “magic numbers”.

While academics might argue if such things exist, market players put a lot of weight (and money) on the way certain financial instruments, indexes and currencies seem to behave near a certain number – usually a round figure.

Economists, looking months and years into the future to predict the path of entire economies, could well declare themselves immune to the superstitions of daily market movements.

But they too are victims of the psychology of round numbers – or to be precise, zero.

Take Tuesday’s shock preliminary UK GDP figures, which at -0.5 percent came well under even the most pessimistic forecast for +0.1 percent growth.

It’s always easy to say in retrospect, but there were some clues that a below-zero figure might have been on the cards. PMI surveys two weeks ago showed Britain’s service sector, which makes up the bulk of the private economy, declined unexpectedly in December, as did the construction sector. Retail sales figures for last month were also dire.

Still, no economist was willing to break through that zero threshold – and not for the first time.

from MacroScope:

Darkening outlook for UK housing

The outlook for the UK housing market has darkened again. The usually optimistic bunch of property market watchers polled by Reuters, who have tended to predict ever-rising property prices no matter what the season or financial climate, now say the market will move sideways for the next two years.

They say that in the next few months, the small double-dip in prices that has begun will continue. Modest gains predicted less than three months ago for this year and next essentially have been wiped away.

No one should be surprised by this.  It smacks of an awakening to reality more than a slight change to a few variables in the statistical model. What’s perhaps most striking about these new poll results is that economists think houses are even more overvalued now than they were in July even after a few straight months of falls.

The poll found the proportion of property market watchers who expect a double-dip in prices has swung to a three-quarters majority from about one in four minority in July. As polls go, that is a big shift in sentiment in a very short period of time. The consensus points to a 5 percent fall from here on top of the 1.4 percent fall over the last two months, but the forecast range goes as far down as 22.5 percent from here.

That tallies with anecdotal evidence. A friend who is heavily invested in London property says he's having trouble selling and says a 15-20 percent fall in the market is likely.

Transaction volumes in Britain’s property market have slowed to a trickle, mortgage approvals are low, and banks are now asking for huge deposits and making rigorous income and credit checks before lending huge sums of money.

Rents are rising again after years of stagnation because people either can’t afford to buy or are scared to buy ahead of another potential fall in prices.

from MacroScope:

Slowing growth, MPC splits? That’s so 2008

Sixties nostalgia was all the rage in the late 90s, and towards the end of the last decade we looked back only 20 years or so for a massive 80s revival in electronic pop and fashion.

With the 2010s in full flow, the current vogue of choice derives from just two years ago – at least among those noted trendsetters, economists.

Back in mid-2008, the signs for the UK economy were confusing and ominous. Inflation was too high, forward-looking indicators pointed to a slowdown of some sort in the near future, and the July minutes of the Bank of England’s monetary policy committee showed they debated both easing and tightening interest rate policy.

Step forward into 2010. In Wednesday’s July MPC minutes they discussed both easing and tightening while digesting a puzzling picture of – yes – high inflation and forward-looking surveys pointing to a slowdown of some sort in the near future.

“Do we have a much clearer idea over where monetary policy is going in the rest of the year?” asked Investec economist Philip Shaw after seeing the latest minutes.

“No. It’s shrouded in confusion,” was the stark conclusion.

Reuters’ latest long-term UK economy poll underscored this familiar sense of doubt. It showed a range of some 2.7 percentage points separating the lowest and highest forecasts for UK economic growth next year, compared to a 2.4 percentage points gap in the corresponding forecasts from the July 2008 poll.

George Osborne takes risk with rhetoric

George Osborne once said he spends more time thinking about politics than he does about economics.

Now that he’s Chancellor of the Exchequer, he probably needs to think about the latter a bit more.

Markets are likely to forgive him his first news conference at the Treasury today. But they may not always be so kind.

His warnings that Britain could end up like Greece were skirting the line when in opposition but could really put the frighteners on investors who are already very nervous about sovereign debt.

Ditto the comments on black holes. Politicians love black holes but the last thing the guardian of the nation’s public finances need to be telling potential buyers of UK government bonds is that the situation is even worse than they thought.

Markets are not stupid, Osborne said this morning. But while they may identify his comments as political rhetoric for now, they could just as easily take him at his word. And that could spell real trouble for the pound and gilts.

from MacroScope:

‘Ken Clarke for Chancellor’ is no joke

Ken Clarke shouldn’t underestimate how strongly the city economists polled by Reuters last week want to see him serve as Britain’s finance minister next term.

The Conservative shadow business secretary and one time ex-Chancellor gleaned a few laughs from Thursday’s BBC Question Time audience when asked about the poll, saying: “There’s a limit to how much of a glutton for punishment you’re going to be.”

But economists would dearly like to see the 69-year-old’s appetite for punishment return soon. No-one came close in the Reuters poll to touching Clarke for popularity. Some 16 out of 29 economists picked him as their first choice for Chancellor.

This was more than twice the number of economists who want to install second-placed Vince Cable, the experienced Liberal Democrat treasury spokesman whose quick wit has made him a public favourite.

For Clarke to serve, Conservative leader David Cameron would first have to dump the party’s likely choice for finance minister George Osborne – a decision that would mean Cameron had gone “slightly off the rails”, according to Clarke.

On Question Time, Clarke was loyal and wholesome in his support for Osborne, who fared poorly in the Reuters poll. He finished fourth from the five choices on offer and behind the current Labour incumbent, Alistair Darling.

BoE’s King “doesn’t do sex appeal”

Bank of England Governor Mervyn King was on good form when he addressed the Royal Society – Britain’s oldest scientific discussion club – on the vexing issue of communicating complex forecasts to the great unwashed.

Aside from his usual moan about the media’s desire to reduce the BoE’s beautiful but baffling ‘fan charts’ of inflation forecasts to one or two numbers, he made a rare and welcome admission that in past years the central bank had not done as well as it could have to flag up the risk that a financial crisis was about to happen.

The BoE’s financial stability reports – like those from many other central banks – sometimes sounded as if they were crying wolf in the years running up to the credit crunch by warning of pretty much every risk to markets short of Martian invasion.

So King’s suggestion that in future the BoE might give a percentage probability for whether the world is about to go to hell in a hand basket would certainly make it clearer to see when the central bank really thinks the storm clouds are gathering.

(Though of course when their 20% forecast comes true, they’ll be asked why they didn’t give shorter odds, and when it doesn’t they’ll be accused of scaremongering.)

Sadly the message that less is sometimes more doesn’t seem to be getting through when it comes to the BoE’s quarterly forecasts of growth and inflation.

As well as fan charts, King said we might be able to look forward to ‘probability ribbons’ and 3D graphs (colour-coded for probability density) that most resemble a map of ski runs for an Alpine resort.

Webcast: Gordon Brown’s speech at Thomson Reuters

Prime Minister Gordon Brown set out his economic plans during a Newsmaker event at Thomson Reuters on Wednesday. Brown said he believed Britain would maintain its coveted AAA credit rating and announced a pay freeze for senior civil servants and military officers to help reduce a record deficit.

Below is a recorded webcast of Brown’s speech and the Q&A session that followed.

What did you think of the Budget?

Chancellor Alistair Darling has made his second annual Budget speech to parliament. Among the measures announced to the House were an increase in petrol duty of 2p per litre in September and a 2 percent increase in alcohol and tobacco duties from tonight.

Darling also announced a scrappage scheme offering £2,000 to people trading in cars older than 10 years for a newer vehicle. From next April there will be a new top tax rate of 50 percent for those earning more than 150,000 pounds a year.

Meanwhile, the annual limit on individual savings accounts has been raised to 10,200 pounds and the Stamp Duty holiday on properties sold for less than 175,000 was extended until the end of the year. There was also money for wind farms and an extra 1 billion pounds to help homeowners and the construction industry.

Darling also forecast that the UK economy will shrink by 3.5 percent in 2009, saying “No country could insulate itself from the world downturn.”

David Cameron, leader of the opposition Conservative party, said: “He is planning to borrow 348 billion pounds over the next two years, that is more — over just two years — than every previous government put together, not just every government since World War Two … but since the Bank of England was first founded more than 300 years ago. This budget does not do enough to bring the public finances under control.”

What did you make of the Chancellor’s Budget speech? Will you benefit from any of the measures? What are your thoughts on the increase in fuel, alcohol and tobacco duties? Do you think the scrappage scheme and new tax rate are a good idea? Finally, do you think it will have a positive effect on the UK economy?

In for a penny, in for £175 billion

It may not be tax and spend exactly, but it’s definitely tax and borrow.

For the best part of 12 years, Labour has pursued essentially conservative (with a small ‘c’) economic policies, steadily underburdening itself of the ‘fiscally unreliable’ tag that some earlier Labour administrations were (wrongly or rightly) saddled with.

And for most of the past 12 years, as the global economy steadily expanded and Britain’s along with it, with aggregate wealth rising smoothly, Labour looked strong at the helm each time the budget came around.

But since the global economic crisis hit in late 2007,  it has become much harder for the government to keep a tight rein on the fiscal strings as growth has taken a hit, unemployment has risen sharply, and tax receipts have declined. 

Last April’s budget was a tough one for Labour, but Wednesday’s budget may well go down as the one that really showed the government reeling as it tries to keep a grip on the purse strings in some of the most challenging economic circumstances imaginable.

The numbers tell the story and are in some cases eye-bogglingly huge.

Finance minister Alistair Darling says the government will have to borrow 175 billion pounds this year and almost as much next year (173 billion) as it tries to plug a widening gap in its finances. WIth the Debt Management Office already struggling to raise funds (if one recent debt auction is anything to go by), the borrowing requirement could be a very big ask.