That sinking feeling

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.


  1. Andrew Forbes
    September 5, 2008

    The govt might realise it's running out of money, but it has cancelled a planned payment to the people, albeit a very clumsy one. It hasn't even thought about tackling waste yet.

    In other words, in these hard times, they've got a limited pot of our precious money, and have had to prioritise spending it on us, or spending it on themselves. And they've made their choice.

  2. Brian Tomkinson
    September 5, 2008

    As you say, oil is down substantially on its high, but petrol prices and gas and electricity prices do not reflect this. In the case of the energy prices they are still going up by massive amounts. This will no doubt be partly explained by the weakness of the pound against the dollar which would surely be exacerbated if the MPC had taken your advice and cut interest rates.

    reply: The US cut rates and the dollar rose.It depends what else you do.See my whole package.

  3. Acorn
    September 5, 2008

    Am I imagining it; is this government's rhetoric starting to move slightly to the right, particular Blunkett's comment? see :-

    What do you think of this one John. Local Income Tax, but not exactly that local me thinks. The Q&A in the blog is interesting. Should I buy a second home in Scotland?

    Reply: I am again t Local Income Tax – don't let another load of politicians have their hand in your wage packet directly.

    1. James
      September 5, 2008

      John, are you then happy to keep the present system of Council Tax, continually increasing ever upwardly in large amounts?
      Have you written in more detail on the subject before or do I have to buy one of your books?

      Reply: No, we need better spending control by Councils. I have not written on the subject of reform of Council taxation, as to me the problem is one of spending too much, not how you raise the money to waste. I want fewer executive officials, fewer consultants, fewer glossy brochures etc etc

  4. Tony Makara
    September 5, 2008

    " 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 "

    The problem is the Dollar has to be strong to prevent the flight into commodities and that in turn will add to the severe trade deficits that America has suffered this century. The various free-trade agreements and further proposed agreements do and will continue to unbalance the US economy, this is a problem that the democrats, to a degree, have promised to rectify. America cannot keep running up trade deficits, especially with China holding to a policy of hoarding Dollars. John McCain needs to look at this issue and take soundings from the business community and not from academica, which only sees economics in abstract rather than concrete, real-life, terms.

  5. mart
    September 5, 2008

    Dear John, I always enjoy your clear blog articles on the economy. In this one, though, I believe you ought to have mentioned tax levels as one of the factors limiting growth in the economy. It is the only factor that is freely controllable by government. Yet they do not use it, or, worse, they are pushing the lever in the wrong direction – for example with their "unfunded" tax cut effective this month.

    The BoE chooses not to lower rates for fear of letting inflation get out of control, so we are told. I support that decision – I don't want a period of crazy house price inflation to be followed by a period of crazy inflation of my currency. Already at 5 percent (or whatever it really is) my "pound in my pocket" is shrinking in its purchasing power much too fast for my liking. And my salary is not increasing in line with it.

    We need an economic policy in this country that shakes inflation and over-borrowing out of the system as soon as possible. By inflation I mean both property price inflation and more general currency inflation. By borrowing I mean government and personal borrowing. Keeping interest rates on the "high side" will bring pain before relief, I realise that. But the pain is due to the binge, not to the medicine.

    If the BoE were to lower rates now, as you suggest, they would stimulate an economy to borrow and inflate, but the economy has too much borrowing and inflation in it still. I don't think we have had our full course of the medicine yet. It's too early to stop taking it.

    Thank you once more; and I look forward to your next blog entries!

    Kindest regards

  6. figurewizard
    September 5, 2008

    Today we hear from Gordon Brown that there will be no payments to the poorest in our society to help them with their energy bills. However in 2005 as Chancellor he doubled the development tax on North Sea oil, adding billions to the Treasury coffers since. At the time he said categorically that this new money was to be used 'to alleviate fuel poverty.' Has he forgotten about this or was he being economical with the truth?

  7. Freeborn John
    September 5, 2008

    One thing that puzzles me is that governments which set such store in controlling retail price inflation seem unconcerned by house price inflation. It cannot be that there are no political consequences to a house price boom & bust because both the 1987-1992 administration and the current government lost popularity because of ‘negative equity’. Is it simply impossible to control asset prices? Or perhaps we always ‘fight the last war’ i.e. orientate today’s policy to preventing a repeat of the high consumer inflation in the 1970s? Or maybe the long-term consequences of house price rises & falls are just not serious for the wider economy? I am confused but there must be some economic logic behind the relative lack of political concern regarding house prices.

    1. Neil Craig
      September 5, 2008

      Continued wide fluctuations in prices are a sign that the laws of supply & demand are not working. In oil it is a sign that suppliers are already working at pretty much full flow (new fields, for example in Alaska, not being allowed to open). In housing it is a sign that the number of new houses built is limited not by market capacity but by government regulation.

      In Titian paintings it is a sign that Titian is dead.

      1. Freeborn John
        September 5, 2008

        Thanks Neil. I can see your point that supply of housing is relatively fixed, and that demand will go up and down with the economy. Central bankers warn about ‘irrational exuberance’ in the stock market but no politician ever seems to try to talk down the housing market despite property being a far more localised market than stocks and that a property bust will probably impact the public directly and so feed through into lost votes.

        Purchasers of overpriced property of course have no one to blame but themselves at the end of the day but it won’t stop them taking out their frustration at the ballot box. Maybe there are just no votes in a government being able to say “I told you so” either 😉

    2. DBC Reed
      September 6, 2008

      Freeborn John's comments are very much to the point: politicians and economists don't take house prices seriously in this country. Indeed
      there is a hare-brained school of thought that house price inflation is good for the economy: this fallacy has been predominant although the 70's Heath/ Barber '' dash for growth'' by means of a ''give-away budget'' demonstrated thirty years ago that ,if you give British people more money (Barber lowered taxes),they don't spend it in the shops ,they misdirect it into a house-price bubble instead.
      70's house prices went up 70% in two years after the Barber budget, with no hint of alarm from politicians and the Press who rounded on the unions in concert ,although the workers were as Enoch Powell said '' innocent as new-born lambs''.The Tories and then the monstrous Callaghan chased the Union fox to exhaustion, in the process destroying the country's manufacturing base which commentators were saying at the time we did n't really need; we could live off financial services(!!);all this metal-bashing was a thing of the past.
      The simple answer is to issue cheap credit to stimulate demand for goods and services and block it leaking it into housing by a tax.As the inflationary element in the price of a house is the land underneath, this what you tax .This has always been obvious.
      The notion that the economy is best served by giving people loadsa money and leaving them to spend it as they will is magnificently idealistic and as a left-inclining person I can see that it outdoes anything on the left
      for nobility of purpose, whilst being attractively romantic and doomed.
      But experience has shown over and over again,that given choice British people ''invest'' in housing rather than have a good time ,so politics has becomes a thirty year First World War with the same ground being churned up as '' ignorant armies armies clash by night''.

  8. adam
    September 5, 2008

    Whatever they say in Scotland, Labour hate council tax and will destroy it.
    I can only speculate the reason, it obstructs their centralised control of everything and i think it got in the way of them trying to regionalise the police force.

    When i looked at Croydon Councils accounts, 2/3 of the annual council tax went on something called housing benefit, alone. The amount that goes on stereotypical council activites is minute.

  9. Johnny Norfolk
    September 5, 2008

    Thank you for that information. You are the first person to explain in simple terms just where we are. I have not heard any explanations in the media least of all the BBC and cretainly not the labour government as listening to Brown ( in his black tie as he was in Scotland and not the city,) he thinks it will be all over by Christmas.

  10. Susan
    September 5, 2008

    Until MPs of Mr Redwood's calibre are on the front bench of a Conservative government we will not have the change the country needs. As much as I wish, I can't see this happening, even in the event of a Conservative government at the next GE. I'll probably vote elsewhere unless Mr Cameron states, unequivocally, what his policies will be. I understand that taxation is difficult because the totality of the books isn't seen until the day, but … … I do hope for honesty in a new govt. We really do need the truth and the end of 'spin'.

    It can't be 'Conservative for the sake of being Conservative' or 'Labour because that's how my parents voted'. It's time now for a government to treat the electorate with respect and tell the truth. We demand much from our public servants and deserve no less.

  11. Matthew Reynolds
    September 5, 2008

    A nice big stimulus package this Autumn would get the economy moving again as the highstreet saw bigger sales on the back of people on modest incomes spending their extra cash . A mini- Christmas spending boom on the back of a Christmas bonus for families on child benefit , a doubling of Winter fuel payments and a trebling of the tax refund for basic rate taxpayers under 65 would be a £10 billion shot in the arm for our failing economy.

    Then taking £15 billion out of the economy in 2009-10 in public spending cuts would slash the PSBR & allow lower interest rates thus allowing an economic recovery . QUANGO's costing £100 billion and too many people being economically inactive are an obvious target for cuts .

    A radical fiscal policy could help limit a recession and get the economy back on track !

  12. Bazman
    September 6, 2008

    Why should any government help anyone with their energy bills? The market should set the rate. It's like people receiving benefits when they have a job. The government is subsidising the company and ensuring they get the payments from the customer. It would be nice to know how you right wingers square this one off? In a socialist way perhaps?
    Russian are often told they get their gas to cheap and need to pay world prices on meters by their own government and western annalists. The country floats on oil/gas and yet most of the population just survive by growing their own vegetables.
    Sound familiar? It should.
    The energy companies are foreign owned and if they do not have a cartel, then just follow each other. They will invest in where they see fit, which may not be Britain. They will could increase prices to whatever level they can, maybe instead of investing.
    "What can we get away with? and how long can we get away with it." Millions face financial problems while companies and banks make millions and their bosses get 20-30 % pay rises. Helped by Bill Gates apologists on all sides.
    Most of these 'profits' if you follow the money trail, comes from the taxpayer, or in the form of bills that cannot be avoided by millions on low pay. People are getting wise to this exploitation by big business and a few elite.
    The falling house prices are caused in a large part by just being to expensive. There is a limit to what people can afford and also what a house is worth. Cornflake Hill is where many people are living and like the Poles returning home, have had enough.

  13. mike stallard
    September 6, 2008

    It will not be easy to cut government spending.
    In the first place, nobody seems able to distinguish between a teacher and an administrator, a nurse and a HR consultant or between a policeman on the beat and a smart white shirted person behind a desk with epaulettes.
    Tony Blair knew this with his Schools'n'ospitals.
    Second, the bureaucracy is specially designed (by itself) to survive. It is resilient, unapologetic and it sloses ranks when under attack.
    Third, which Minister will voluntarily offer to reduce the importance of his own department when it comes to allocation of funds? What about the Culture Minister? Or the Minister Responsible for School Meals? And their staffs……
    Is David Cameron the man to arrange this?
    Only asking.

  14. Neil Craig
    September 7, 2008

    If a minister were appointed with the particular public remit to wind up, say, the DTI, within 1 year, probably hiving off the ears & tail to some other depts. then he would do it. If he is appointed to run the department more efficiently he is bound to become the department's lobbyist in cabinet, as normal.

    If it is seriously intended to cut back government I would suggest Mr Cameron selects 2 ministries for such treatment (it almost doesn't matter which 2). Once it was clearly happening the other civil servants would be very very co-operative.

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