So how bad do you think things will get? - Credit crunch
Discussion
This is not meant to be a doom and gloom / don't panic Mr Mannering post, but it does seem to me the economy is heading for a very tough time indeed. Tesco Christmas retail figures, just out show a poorer than forecast result, and with every £1 in £6 spent on the British "high street" spent there they must be a fairly good barometer.
The cost of living is getting higher every day, on average £2500 more than this time last year. Credit is getting harder for some people to obtain, think approval rates for new or re-mortgages, and thats on top of reports that up to 4 million of us are paying our mortgages / rents with credit cards.
A report in a property journal this week claims that a major UK house builder has asked suppliers to reduce already agreed invoices, to try and limit losses.
Oil is hitting record highs.
On the plus side Interest rates are fairly low and look set to drop this year, and housing demand is outstripping supply.
So will it all blow over or could this just be the start of a major recession?.
The cost of living is getting higher every day, on average £2500 more than this time last year. Credit is getting harder for some people to obtain, think approval rates for new or re-mortgages, and thats on top of reports that up to 4 million of us are paying our mortgages / rents with credit cards.
A report in a property journal this week claims that a major UK house builder has asked suppliers to reduce already agreed invoices, to try and limit losses.
Oil is hitting record highs.
On the plus side Interest rates are fairly low and look set to drop this year, and housing demand is outstripping supply.
So will it all blow over or could this just be the start of a major recession?.
jamesuk28 said:
So will it all blow over or could this just be the start of a major recession?.
It can't blow over..the average adult has a ~£30k debt apparently..
so lets think about that..
That's £30k they didn't have, but have now spent.. which means ALOT more money than shouldve, has been pumped IN to the economy over a period of years... People will then have done what they typically do.. and live to their new limits... with little slack spare..
Now.. they realise that the unending property wealth increase has ended.. and is even starting to revert in some places..
Now, they have two choices..
a) don't spend of luxuries, and don't pay down any / much of their debt for the next 10+ years
b) pay down their debt, buy alot less of everything over the next 10+ years
either way, alot less money is going IN to the economy, which means more people will inevitably be laid off, this adding to the cycle...
Recession, 100% guaranteed.
Bad Recession, maybe ... maybe not..
Don't forget, there are alot of people actively angling FOR a recession..
a recession makes the RICH much much richer..
Anyone with substantial amounts of liquid wealth will rub their hands with glee at the thought of a market crash.
this wont be a fun decade IMHO.. although I'd love to be wrong.
J
We are also seeing the end of quite a few other things which will contribute IMO.
I think large companies have basically been "raping" everything they can get their hands on to bring cheap products to market to meet consumer demand, regardless of who they upset or destroy in the process.
I think much of this is coming to an end. Chinese manufacturing is going up in price, there is a backlash against things like mass-produced and badly raised meat - which all sounds petty but could have big effects on inflation and peoples income, especially when trying to reign spending in.
I think large companies have basically been "raping" everything they can get their hands on to bring cheap products to market to meet consumer demand, regardless of who they upset or destroy in the process.
I think much of this is coming to an end. Chinese manufacturing is going up in price, there is a backlash against things like mass-produced and badly raised meat - which all sounds petty but could have big effects on inflation and peoples income, especially when trying to reign spending in.
I'm normally quite gloomy about the situation, my gut feeling is that things will continue until we accept the pain of interest rate rises to stamp on inflation and the expansion of the money supply is addressed.
However a more positive outlook is possible:
Household finances are in decent shape. Their bank deposits grew 8.3% in the year to November, to £930bn (table A4.1 here). This is more than four times their non-mortgage debt, and is equivalent to over a year's disposable income.
2. Retail sales are at a record low relative to house prices. As common sense suggests this ratio should partly mean-revert (if it didn't we'd all end up as misers living in massively-priced homes), it points to sales rising relative to house prices. So perhaps consumers, showing the wisdom of crowds, are preparing for a weak housing market. US spending has held up well so far despite the housing slump, so why shouldn't it do so in the UK?
3. The mortgage reset problem is overdone. Let's do a rough sum. Anyone who took out a two-year fixed rate mortgage in early 2006 faces a rise in mortgage rates of around 1.2 percentage points. With 1.4 million households due to refinance this year, this implies £2.5bn of extra mortgage payments a year, if we assume an average mortgage of £150,000. This is less than 0.3% of aggregate household income.
4. Company profits are high. This matters, because it means pressures on firms to cut jobs aren't especially severe. And if the labour market stays firm, so should spending.
Although these thoughts seem inconsistent with today's market opinion, they are in fact conventional among economists. The consensus forecast (pdf) is for household spending to grow 1.8 per cent this year. Though this would be its slowest rate since - well 2005 - it's hardly a catastrophe.
Does this mean retailers are moaning too much? Not necessarily. I suspect their problems this year will be not so much the aggregate volume of sales, but rather pressure on margins. Sterling's fall will raise the cost of some imported goods - adding to rising costs of rent and wages - whilst intense competition (caused in part by retailers' expansions of recent years) will make it hard to pass these increases on.
However a more positive outlook is possible:
Household finances are in decent shape. Their bank deposits grew 8.3% in the year to November, to £930bn (table A4.1 here). This is more than four times their non-mortgage debt, and is equivalent to over a year's disposable income.
2. Retail sales are at a record low relative to house prices. As common sense suggests this ratio should partly mean-revert (if it didn't we'd all end up as misers living in massively-priced homes), it points to sales rising relative to house prices. So perhaps consumers, showing the wisdom of crowds, are preparing for a weak housing market. US spending has held up well so far despite the housing slump, so why shouldn't it do so in the UK?
3. The mortgage reset problem is overdone. Let's do a rough sum. Anyone who took out a two-year fixed rate mortgage in early 2006 faces a rise in mortgage rates of around 1.2 percentage points. With 1.4 million households due to refinance this year, this implies £2.5bn of extra mortgage payments a year, if we assume an average mortgage of £150,000. This is less than 0.3% of aggregate household income.
4. Company profits are high. This matters, because it means pressures on firms to cut jobs aren't especially severe. And if the labour market stays firm, so should spending.
Although these thoughts seem inconsistent with today's market opinion, they are in fact conventional among economists. The consensus forecast (pdf) is for household spending to grow 1.8 per cent this year. Though this would be its slowest rate since - well 2005 - it's hardly a catastrophe.
Does this mean retailers are moaning too much? Not necessarily. I suspect their problems this year will be not so much the aggregate volume of sales, but rather pressure on margins. Sterling's fall will raise the cost of some imported goods - adding to rising costs of rent and wages - whilst intense competition (caused in part by retailers' expansions of recent years) will make it hard to pass these increases on.
Plotloss said:
jamesuk28 said:
A report in a property journal this week claims that a major UK house builder has asked suppliers to reduce already agreed invoices, to try and limit losses.
Got a source for this chum?Bryant Homes calls on suppliers to reduce prices by five per cent
By David Rogers
10 January 2008
Construction News
NEWS - Taylor Wimpey company blames 'difficult year' for pressure to discount current and future work costs
Shocked trade contractors have been asked to knock money off previously submitted bills by the UK's biggest house builder Taylor Wimpey.
Firms who carry out work for Taylor Wimpey 's Bryant Homes arm have been sent letters by directors asking them to accept less for invoices.
Last week's letter, dated 2 January, says: "We need to take urgent action to manage down our cost base. We are reviewing our own overheads, house designs and build processes to drive out inefficiencies but also need subcontractors to play their part.
"We are therefore introducing a five per cent reduction in price on all outstanding works on existing orders as well as all future orders placed after 2 January 2008 and will be looking for an equivalent reduction in future tenders." Directors at Bryant's Southeast operation say the plea has been issued because "2007 has been a difficult year for the house building industry and this situation seems likely to continue into 2008".
The letter adds: "We want to try to maintain a steady rate of sales and build across all of our sites because this will allow us to maintain our capacity to grow should the market recover and we believe this is also in the best interests of our trade partners." The letter also indicates the firm's current credit terms of one month may also be changed if savings cannot be found elsewhere. It says: "We do not, at this stage, propose to change credit terms but will have to review this if we are not able to reduce the overall costs." The economics director of the Home Builders Federation, John Stewart, said he could not comment on the policies of individual firms but said: "I haven't heard of this before but the second half of last year was very difficult for house builders.
Volumes and reservations are under considerable pressure." Last week, the Bank of England said mortgage approvals in November fell to a threeyear low at 83,000 – down from 89,000 in October and the fifth consecutive monthly fall.
But one subcontractor said: "I don't remember getting a letter when the market was booming saying 'here, we're doing so well we're going to increase your rates'.
"This is just bullying tactics.
They're still selling houses and it's nothing like a recession, it's a slowdown at best." The £7 billion turnover Taylor Wimpey was formed last summer by the merger of Taylor Woodrow, which included Bryant Homes, and Wimpey.
A spokeswoman for the firm said: "Taylor Wimpey is committed to reducing costs and we expect our trade partners to work with us to do so. This is particularly critical in the current market environment." Tay lor Woodrow pa id £632 million for Bryant when it bought the company in March 2001.
Taylor Wimpey squeezes suppliers as crunch bites
By Sophie Brodie and Angela Monaghan
Last Updated: 6:17am GMT 10/01/2008
Taylor Wimpey has told suppliers it intends to pay them 5 per cent less as house prices fall and the credit crunch impacts on housebuilder profits.
The company, whose shares have plummeted 45pc since it was formed out of Taylor Woodrow and George Wimpey last summer, has sent a letter to suppliers warning of imminent cuts.
It blamed the move on a difficult 2007 which looked likely to continue in 2008. It said that because "urgent action" was required, the 5pc pay-cut would apply to outstanding work and orders placed after January 2.
The letter said: "We are reviewing our own overheads, house designs and build processes to drive out inefficiencies, but also need our subcontractors, suppliers and consultants to play their part."
A spokesman for Taylor Wimpey told trade magazine Building: "Taylor Wimpey is committed to reducing costs and we expect our trade partners to work with us to do so." Shares closed down 9.3 at 161.4p.
The news of belt-tightening came as Persimmon, the UK's largest housebuilder, reported a 14pc drop in forward sales to £603m, sending the shares of rivals in the sector tumbling further.
Barratt Developments fell 8pc to 333p, Bellway 5.8pc to 688p, Bovis 4.9pc to 506p and Berkeley 4.7pc to 887p.
Persimmon chief executive Mike Farley said: "Volumes have been impacted as lower consumer confidence and the tightening of credit markets reduced activity in September when markets typically get going again."
He said that cancellations during the period had been 30pc, compared with the normal 20pc figure. As a result, sales completions slipped 5pc to 15,905 homes.
Mr Farley said that Persimmon had increased the number of incentives offered to buyers such as help with moving costs and stamp duty.
Analysts at Dresdner slashed their earnings forecasts for Persimmon this year and next, saying: "It is too early to predict the outcome of the housing market in 2008.
Suffice to say, we believe it could be very, very bad."
However, Mr Farley said there was no sign yet of drastic house price falls in the family home market, citing the latest figures from the Halifax, which showed a small rise in December.
Persimmon saw the average price per home increase from £188,129 to £189,558, and expects to continue to improve its margins. Dresdner, however, expect margins to fall from around 21pc to 15pc over the next 12 months.
The shares tumbled to 612p at one stage yesterday before recovering to close down 6½ at 645p but still 56pc off their 12-month high of £14.82.
matsmith said:
jamesuk28 said:
Oil is hitting record highs.
im not gonna get too involved in this thread but just felt that i needed to point out that oil has infact dropped to 90 bucks a barrel from its 100+ the other dayhopefully we will see some of this drop at the pumps soon
As far as seeing drops at the pumps, your a funny guy.
jamesuk28 said:
matsmith said:
jamesuk28 said:
Oil is hitting record highs.
im not gonna get too involved in this thread but just felt that i needed to point out that oil has infact dropped to 90 bucks a barrel from its 100+ the other dayhopefully we will see some of this drop at the pumps soon
As far as seeing drops at the pumps, your a funny guy.
The projected interest rate cuts later in the year will be interesting to watch. Will the banks actually pass on the cuts and make it easier for FTBs to get on the ladder and remortgagers to escape a nasty shock or will they keep margins up and keep approvals tighter.
Oil is priced in US$ so any drop in oil price is likely to be offset by a weakening £ against $ in the next few months. Hence, pump prices unlikely to drop.... and to think Brown got his crafty 2.x p extra tax on there quietly without to much furore.
As usual, Labour's sh*t don't stink when it comes to UK lefty media.
Brown will probably get away with blaming the whole coming UK recession on US as well...
Rant over.
As usual, Labour's sh*t don't stink when it comes to UK lefty media.
Brown will probably get away with blaming the whole coming UK recession on US as well...
Rant over.
jamesuk28 said:
Plotloss said:
jamesuk28 said:
A report in a property journal this week claims that a major UK house builder has asked suppliers to reduce already agreed invoices, to try and limit losses.
Got a source for this chum?Bryant Homes calls on suppliers to reduce prices by five per cent
By David Rogers
10 January 2008
Construction News
NEWS - Taylor Wimpey company blames 'difficult year' for pressure to discount current and future work costs
Shocked trade contractors have been asked to knock money off previously submitted bills by the UK's biggest house builder Taylor Wimpey.
Firms who carry out work for Taylor Wimpey 's Bryant Homes arm have been sent letters by directors asking them to accept less for invoices.
Last week's letter, dated 2 January, says: "We need to take urgent action to manage down our cost base. We are reviewing our own overheads, house designs and build processes to drive out inefficiencies but also need subcontractors to play their part.
"We are therefore introducing a five per cent reduction in price on all outstanding works on existing orders as well as all future orders placed after 2 January 2008 and will be looking for an equivalent reduction in future tenders." Directors at Bryant's Southeast operation say the plea has been issued because "2007 has been a difficult year for the house building industry and this situation seems likely to continue into 2008".
The letter adds: "We want to try to maintain a steady rate of sales and build across all of our sites because this will allow us to maintain our capacity to grow should the market recover and we believe this is also in the best interests of our trade partners." The letter also indicates the firm's current credit terms of one month may also be changed if savings cannot be found elsewhere. It says: "We do not, at this stage, propose to change credit terms but will have to review this if we are not able to reduce the overall costs." The economics director of the Home Builders Federation, John Stewart, said he could not comment on the policies of individual firms but said: "I haven't heard of this before but the second half of last year was very difficult for house builders.
But one subcontractor said: "I don't remember getting a letter when the market was booming saying 'here, we're doing so well we're going to increase your rates'.
"This is just bullying tactics.
Taylor Wimpey squeezes suppliers as crunch bites
By Sophie Brodie and Angela Monaghan
Last Updated: 6:17am GMT 10/01/2008
Taylor Wimpey has told suppliers it intends to pay them 5 per cent less as house prices fall and the credit crunch impacts on housebuilder profits.
The company, whose shares have plummeted 45pc since it was formed out of Taylor Woodrow and George Wimpey last summer, has sent a letter to suppliers warning of imminent cuts.
Persimmon for instance saw the average price per home increase from £188,129 to £189,558, and expects to continue to improve its margins.
And as for reducing their O/H their direct will be fixed and they won't wish to get rid of any more staff and their indirect o/h will take even more of a spanking whilst using the phone bill more +++.
Poor sub-contractors & suppliers.
I don't personally beleive that the B of E's rate rise on the summer was the best concieved action in it's short history of 'indepenadance'.
As I've said on PH before, there was already a reasonable amount of data (and good degree of noise in the case of Sports Direct) to indicate that the unprecedented wet weather had made a considerable impact into many areas of the economy. Add-in the fall-out from Northern Crock and the B of E's actions created a tripple whammy.
In time to come this may well be seen as the wrong call and the trigger for a much harder landing that was admittedly required.
As I've said on PH before, there was already a reasonable amount of data (and good degree of noise in the case of Sports Direct) to indicate that the unprecedented wet weather had made a considerable impact into many areas of the economy. Add-in the fall-out from Northern Crock and the B of E's actions created a tripple whammy.In time to come this may well be seen as the wrong call and the trigger for a much harder landing that was admittedly required.
Digga said:
I don't personally beleive that the B of E's rate rise on the summer was the best concieved action in it's short history of 'indepenadance'.
As I've said on PH before, there was already a reasonable amount of data (and good degree of noise in the case of Sports Direct) to indicate that the unprecedented wet weather had made a considerable impact into many areas of the economy. Add-in the fall-out from Northern Crock and the B of E's actions created a tripple whammy.
In time to come this may well be seen as the wrong call and the trigger for a much harder landing that was admittedly required.
I think you are right. As I've said on PH before, there was already a reasonable amount of data (and good degree of noise in the case of Sports Direct) to indicate that the unprecedented wet weather had made a considerable impact into many areas of the economy. Add-in the fall-out from Northern Crock and the B of E's actions created a tripple whammy.In time to come this may well be seen as the wrong call and the trigger for a much harder landing that was admittedly required.
I think those couple of rate rises coming up until then with have to be compensated with two three or four in rather quicker succession.
JustinP1 said:
Digga said:
I don't personally beleive that the B of E's rate rise on the summer was the best concieved action in it's short history of 'indepenadance'.
As I've said on PH before, there was already a reasonable amount of data (and good degree of noise in the case of Sports Direct) to indicate that the unprecedented wet weather had made a considerable impact into many areas of the economy. Add-in the fall-out from Northern Crock and the B of E's actions created a tripple whammy.
In time to come this may well be seen as the wrong call and the trigger for a much harder landing that was admittedly required.
I think you are right. As I've said on PH before, there was already a reasonable amount of data (and good degree of noise in the case of Sports Direct) to indicate that the unprecedented wet weather had made a considerable impact into many areas of the economy. Add-in the fall-out from Northern Crock and the B of E's actions created a tripple whammy.In time to come this may well be seen as the wrong call and the trigger for a much harder landing that was admittedly required.
I think those couple of rate rises coming up until then with have to be compensated with two three or four in rather quicker succession.
http://business.timesonline.co.uk/tol/business/eco...
Digga said:
I don't personally beleive that the B of E's rate rise on the summer was the best concieved action in it's short history of 'indepenadance'.
As I've said on PH before, there was already a reasonable amount of data (and good degree of noise in the case of Sports Direct) to indicate that the unprecedented wet weather had made a considerable impact into many areas of the economy. Add-in the fall-out from Northern Crock and the B of E's actions created a tripple whammy.
In time to come this may well be seen as the wrong call and the trigger for a much harder landing that was admittedly required.
Was inflation over 3% at the time? As I've said on PH before, there was already a reasonable amount of data (and good degree of noise in the case of Sports Direct) to indicate that the unprecedented wet weather had made a considerable impact into many areas of the economy. Add-in the fall-out from Northern Crock and the B of E's actions created a tripple whammy.In time to come this may well be seen as the wrong call and the trigger for a much harder landing that was admittedly required.
I'm still not sure about inflation at 2.1%. So sofas have got cheaper but food, gas and oil have gone. Well the price of sofas doesn't make a great deal of difference to me but I can't avoid eating, going to work and putting the heating on.
In this particular case, it doesn't really matter what inflation actually was at the time.* In certain circumstances, it's clear that rate rises very often have an instant, and disproportionate negative effect, when combined with other factors.
The fact also remains that even the B of E readily admit (check their website) that rate rises can take up to 2 years to take full effect...
The fact also remains that even the B of E readily admit (check their website) that rate rises can take up to 2 years to take full effect...
- Granted of course that the B of E has inflation targets, but even so, in this case there was a bigger picture to view.
Edited by Digga on Friday 18th January 13:29
Digga said:
In this particular case, it doesn't really matter what inflation actually was at the time.* In certain circumstances, it's clear that rate rises very often have an instant, and disproportionate negative effect, when combined with other factors.
The fact also remains that even the B of E readily admit (check their website) that rate rises can take up to 2 years to take full effect...
Isn't the bigger picture that there is to much easy money about due to low interest rates and an increase in the money supply. This has lead to a bubble in asset prices and inflation. The bubble is now starting to deflate and throwing more money at it just devalues currencies further.The fact also remains that even the B of E readily admit (check their website) that rate rises can take up to 2 years to take full effect...
- Granted of course that the B of E has inflation targets, but even so, in this case there was a bigger picture to view.
Edited by Digga on Friday 18th January 13:29
Fittster said:
Isn't the bigger picture that there is to much easy money about due to low interest rates and an increase in the money supply. This has lead to a bubble in asset prices and inflation. The bubble is now starting to deflate and throwing more money at it just devalues currencies further.
I wouldn't disagree - there has certainly been a degree of froth in the economy, but the trouble with blunt instruments like interest rates - when used in isolation - is that they can have further repurcussions and don't always hit the intended targets.In this case, the sort of 'targets' were individuals who see no problem in borrowing money on credit cards, despite punitive APRs. Assuming (and this is a major assumption) that these people do actaully know what rates they're borrowing at, or that they know or care what the current base rate is, or what direction it is changing in is not really a sound strategy.
In the mean time, businesses get clobbered with the same rate rises and the sane majority of SMEs and individuals will nearly always tend towards pulling their (bull) horns in in the face of economic uncertainty and/or the threat of sustained rate rises. OK, this might just head off inflation, but if it doesn't - for example when the key inflationary pressures are B of E rate inelastic (i.e.. global commodity shifts) then surely there's a risk you might just end up with inflation and reduced economic activity. I think that's what most economists call stagflation, and generally beleive to be a 'bad thing'.
Of course all this may be wrong - I'm quite prepared to be told (with the right authority) that I'm talking horse5hit...
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