Current economic trends - call for evidence

[louisiana]

Nationwide seems quite upbeat at the moment regarding 2009. (Is this a dead cat bounce?)

The markets seem less so.

And the jobs market continues to look grim, though unemployment tends to lag.

I'd be interested in any other 'evidence' people can point to, from UK, US or elsewhere, about where we might be on the roller-coaster that is the economy.

[????]

we are going to bounce along where we are now for a few years..

We (companies, govts, individuals) owe far too much

Our assets - houses, shares - even with recent recovery - etc are about 30% of peak in a low inflation environment this will take years to get back to where we were even nominally - in real terms the values were mad anyway

Of course astute and lucky individuals and companies will do well but overall it will be a long hard grind, although I don't 'think' we'll see massive collapses

Public spending will be slashed one way or the other and that will be painful for the sector of the economy that hasn't felt the recession yet - the Public Sector.

Unemployment will rise and relatively soon interest rates will have to rise as there will be huge pressure on our finances as that astute master of the Universe Gordon didn't put anything away for a rainy day during the massive boom of the past few years but spent it all, much on false jobs for labour voters

[Jeremy]

From my perspective - a lot of (not all) financial institutions are in profit this year. This is good news for the whole country, as the financial industry represents a huge chunk of the GDP. Equity markets are stable, and the pound is also stable. House prices are no longer in freefall.

I don't think the situation is as bleak as a lot of people thought it would be, but obviously the problem this country faces now is the huge amount of debt we've racked up. Interest rates will HAVE to rise quite steeply. The public sector is shafted for the forseeable future, with large cutbacks inevitable. Something like 25% of our workforce are public sector - so even if private sector employment increases in 2010, I think unemployment is going to be a problem for a while to come.

[Windom]

Speaking as a (for my sins) financial analyst, the banks are profitable as they are able to borrow at govt rates due to the guarantee (or outright ownership), but instead of increasing lending activity they are hording cash, and are still charging high commercial rates to buinesses thus retarding the recovery. It amounts to a massive transfer of wealth to the same sucking vortex that lost it all in the first place.

[louisiana]

Windom, as someone who is being offered 0.0004% interest on a thousands-of-pounds company savings account by HSBC, the difference between what is being charged and what is being paid has not passed me by!

I had - as I always do when I call the bank, and they ask if I want to transfer money to Money Manager - suggested that they were probably only offering 0.001% so it wasn't worth my while, and I wasn't far wrong! And yes, they are also offering to lend me money at crazy (high) rates.

[Jeremy]

Windom - not sure I agree with too much of that. There are other factors in pricing a loan rather than just interest rates (i.e. credit quality) so to suggest that banks are ripping off customers because they're charging way above the base rate is a bit of a simplification.

[????]

They're hoarding cash 'cos

a) they're still worried about the vunerability of their books and

b) they think (probably correctly) that they need the cash on their balance sheets for when legislation requires banks to have a greater cash ratio. They maybe in profit but it will take years of profit for them to pay us back

It's still pretty f*cked up

[Jeremy]

The likes of RBS and HBOS/Lloyds aren't going to dig us out of this recession... it's rather unfortunate for the government that they ended up owning the rubbish companies.

[Mellors]

Jeremy Wrote:

-------------------------------------------------------

it's rather

> unfortunate for the government that they ended up

> owning the rubbish companies.

But no real surprise eh?

[Marmora Man]

Job prospects.

I know a lot of people networking and looking for new employment having been hit by downsizing / redundancies / loss of work.

They report that most jobs advertised are in the Public and / or charity sector (check out Sunday Times appointments pages). The expectation is that the public sector jobs will start to dry up early '10 in preparation for change of government and radical reductions in the growth of public spending (and even, perhaps, cuts in current levels of spending). No sign or expectation of increase in number of private sector employment for at least another 18 months.

IMO any green shoots will have to be very hardy to survive 2010.

[RoosterMcLooster]

windom. what do you analyse in your professional life? premium bonds?

[????]

And in terms of retail.....

http://news.bbc.co.uk/1/hi/business/8177502.stm

[Windom]

Jeremy whilst there are other factors in pricing individual loans, the fact remains that the spreads on their own cost of finance and the terms on which they are lending are almost unprecedented.

Base rates are low to stimulate the economy but any beneficial effects are greatly reduced by banks unwillingness to pass them on. As we've seen with tracker mortgages creeping up despite no movement in underlying rates.

[alphacalifragelistic]

May I add some further caveats.

Friends of mine in the charity / NGO sector also report significant constraints. Their own investment funds have tracked the markets down, reducing the amount of money they have to spend. (An administrator at a foundation told me back in May that they now have a third less money to spend as a result.)

Anecdotally, I have been told that rather than hiring people, many charities are having to do the opposite. Secondly, they are currently besieged by former bankers, consultants and the like, looking for jobs within that field in an effort to - in the words of a mate of mine in the sector - "wash the stink off themselves". (Sorry to be so direct there, but it is a verbatim quote.)

Public sector spending will have to be significantly curtailed, due to our ballooning national debt. Indeed, there are specific plans to do so:

http://blogs.telegraph.co.uk/finance/edmundconway/100000302/education-spending-will-be-cut-here-it-is-in-black-and-white/

Note the 21.7% cut in funds for the Foreign & Commonwealth Office in 2010. Given ongoing obligations in terms of embassies, core staff, long term commercial contracts, etc, I have difficulty in seeing how that would even be possible.

In other words, the public sector is unlikely to be a source of economic growth in the near future, due to fiscal constraints. There comes a time when quantitative easing ceases to be worthwhile, due to the raised cost of government debt as the bond markets (& rating agencies) lose confidence in UK gilts. However tempting it might be to inflate our way out of this mess, that may be simply replacing one set of problems with another.

Roubini's take on the US economy is that the consumer led boom of the middle of this decade was due to a massive increase in personal debt, mediated via credit cards and Mortgage Equity Withdrawal (MEW). There are parallels with the UK. His point is that the credit card companies are no longer willing (or able) to hand out VISA cards like they were tokens in packs of Shreddies. Moreover, Mortgage Equity Withdrawal is now dead in the US, as is lending secured on property assets in the UK. The loss of this money feeding into the economy is significant. In US terms, MEW accounted for about $700bn in 2005 alone. I.e. The stimulus packages that have been cobbled together are more than balanced by this loss alone.

So, while we have avoided a complete systemic collapse in banking, profound economic problems remain.

As the risk of anecdotal extrapolation, the current small increase in house price indices (which BTW do not include repossessions in their data, thereby resulting in statistical bias) appears to be a result of constrained supply, as potential sellers hunker down and step out of a market that they believe undervalues their primary asset. The government has quietly gone out of its way to encourage 'sensitive' handling of mortgagees in financial trouble, including mortgage holidays (as granted this month to a neighbour a few doors down from me) and the like.

If Danny Blanchflower is right and we are due to see another 1 million + people in UK unemployment by the end of 2010, I think it is fair to expect more forced property sales and fewer prospective buyers. - Who buys a house when they are about to lose their job? Lead indicators, such as new graduate unemployment, are ugly. (I believe that is currently at 50%.)

Incidentally, since this bit of SE London is seen as 'up-and-coming', perhaps this entire area might be considered a useful economic indicator in itself. Can I moot that the withdrawal of external private property developer partners from schemes such the New Cross Gate multi-million pound Clutch Clinic development, augurs badly. If medium term development projects are being cancelled, then expectations for a reversion to business as usual in the next 2-3 years are clearly being questioned by professionals in the field.

Nevertheless, if one looks at graphs of house prices and unemployment during the early 1980's, house prices bottomed out before unemployment peaked. Moreover, stock markets seem happy to climb the 'wall of worry' in anticipation of better times ahead. Company earnings have not been as dreadful as earlier forecasts were making out, although expect some nasty surprises from acknowledged corporate pension fund liabilities to come out of the woodwork over the next year.

In short, I have yet to read a compelling and substantiated 'growth story' yet, describing how and why the UK economy is about to rebound. Reports that we as not as badly dented as it first appeared hardly qualify. Therefore, mark me down as believing that recovery will be 'long, slow and bumpy' and I am glad I do not work in the public sector as that party is definitely over. Please prove me wrong.

[Jeremy]

alphacalifragelistic Wrote:

-------------------------------------------------------

> In other words, the public sector is unlikely to

> be a source of economic growth in the near future

Under what circumstances could the public sector ever be a source of economic growth?

[????]

Jeremy in straightforward terms public sector spending, wether through taxation or government borrowing, is a motor for growth (the argument over its efficieny in doing this is a different one). That's basic Keynesian stuff - the Hoover dam etc

[Huguenot]

Good God, Quids quoting Keynes? Will wonders never cease.

Of course, the New Deal

[Jeremy]

I am not an economist, so perhaps you could explain in layman's terms.

If public spending is increasing as a result of increased tax revenue, then surely that is an indication of growth, not a source of growth?

And if it is increasing as a result of borrowing, then that is in effect artificial growth... it may benefit employment and possibly GDP (not sure how this is calculated?) but it's obviously not sustainable.

[mockney piers]

Whilst I agree that Keynesian stimulus is inflationary if the growth it engenders does not take root outside of the public sector and the borrowing required. But denial that it can stimulate wlgrowth seems a bit weird.

Well no weirder than the idea that an economy based upon service industry speculation based upon growth based upon service industry speculation based upon growth based upon service indu..........

[Jeremy]

I'm not denying it Mockers, just asking for an explanation in Layman's terms (which I fear is not exactly your strength, despite best intentions)!

Aren't public sector organisations essentially internal services which are ultimately paid for by the the private sector (via taxes)? Have I misunderstood the concept of economic growth?

[mockney piers]

No no you are right. I might argue that the public private differentiation is a little bit artificial. Just because it's paid for by a middleman doesn't mean it's not servicing a need, nor that the taxman's pound is somehow less real tha. That of my wallet. Just in a society of selfish oafs like me somethings are better protected from the vagaries of the Market. Or at least that's how I like to think of it. Mind you borrowing. Not bad in and of itself, just not a sustainable way of doing things.

Why is my iPhone capitalising Market? Has apple got an agenda?

[mockney piers]

Ps loving the false modesty, I know you're more knowledgeable than me on these matters :)

[Jeremy]

No false modesty here... economics is not my area (but ask me to how efficiently value a derivative portfolio over a grid of 2000 CPUs, then I might be able to help).

Personally I cannot see how the public sector grow without funds being made available to it. The same way that a business cannot grow if all it's customers are skint, so aren't buying their products any more. The stimulus has to originate somewhere, it can't just magaically appear. IMO the stimulus is going to be the same thing which got us into this mess in the first place - the city. But it will be commission on client business, rather than banks taking on risk.

[mockney piers]

I think you may be confusing growth with profit. There is greater demand for health for instance (demographic changes and population incease) the sector must grow and there then needs to be more jobs, more buildings, machines that go bing.

Just because it's not profit driven doesn't mean the growth is false, even if we borrow to achive this. There is an argument that we could charge for the servi e to foreigners I guess, making it finN ially viable too?

Just an example.

[HAL9000]

Jeremy Wrote:

-------------------------------------------------------

> The stimulus has to originate

> somewhere, it can't just magaically appear.

Money is created out of thin air through a mechanism known as Fractional-Reserve Banking which lies at the heart of the global banking system.