The last couple of weeks have seen confirmation of the downturn on both sides of the Atlantic. House prices continue to fall in the USA, and the UK. Latest figures show UK house prices market now down by 12.7% over the last year, with a big fall of 1.8% in August. UK Car sales fell by 18.6% in August, always a poor month for them anyway. Fears are growing of bad profits performance ahead in the US and the UK. Surveys of confidence and purchasing intentions are in negative territory.
None of this should have been news. My forecasts of falling house prices, slowing activity, poor confidence levels and squeezed profits were not out of line with many other commentators. It’s just the British government which refuses to give us sensible forecasts to help guide markets. Those Ministers who lecture the private sector on the need for transparency are unable to give us any themelves on these important economic matters.
There are two necessary conditions for a recovery. The first is a fall in oil and other commodity prices, to relieve the inflationary pressure. That should in due course enable Central banks outside the US to cut interest rates, and reduce the need for rises by the Fed. As predicted, this is now happening, with oil down substantially on its high.
The second is the creation of more liquidity in Western banking markets, as the banks recapitalise. Recent market events imply this has not yet happened sufficiently. Substantial sums have been put into banks by existing and new shareholders, but banks are now being very cautious and regulators are reinforcing the caution long after the inflationary credit bubble has burst.
Both the ECB and the Bank of England kept their interest rates up this week. They are still fighting inflation more than recession, which does not help bring forward recovery.
Over in Euroland the economy is sinking, shrinking in the second quarter GDP figures. Each main central Bank has now taken lower quality assets from banks as security for cash. Market participants are asking how much more of this can they do, and will they roll these facilities over? It reminds us there are now issues to work through in returning markets to normality, arising from the short term measures the authorities took when the crises were at their height and individual institutions were under threat.
It is still important to watch interest rates and banking liquidity. I am still more worried by prospects for the UK economy than for the US, in view of the large government deficit in the UK and the importance of house prices to the economy as a whole. When the government’s mini package was announced on housing many rightly said it was far more important to know how much liquidity would be supplied to mortgage banks, and how would the Bank of England handle its existing scheme?
The one bit of good news is even this government in the short term seems to realise the money is running out. There may be no additional special scheme to help people with their energy bills this winter, and no windfall tax on the energy companies at a time when we need them to invest more in future capacity. This will disappoint many of the government’s own supporters, but is a whiff of realism after many special increases in public spending. Even the housing scheme contained elements of juggling within existing budgets. Gaining control of public spending is crucial to recovery. Getting priorities right within it to cushion the impact on the most vulnerable should also be part of the government’s response to the economic downturn.