The Business News Source

The UK’s Office of National Statistics alerted markets on Wednesday that it had got its sums wrong. And that worries about the growth of inflation in the economy may be somewhat exaggerated so the need to increase rates may be lessened.

The ONS statement said that it had modified part of its software model to take into account VAT Fraud, but that a mistake had crept into the change, which had a knock on effect to the other figures.

The ONS has corrected the figures and now says that the cash value of national income grew by 4.8 percent not 6 percent as previously stated. The Bank of England monetary policy committee had noted the 6 percent number in the meeting and citied it as a worry as it indicated that inflation was running ahead of growth. With the figure revised downwards one of the reasons to increase rates has abated.

However, as we have pointed out over the last few months there are still reasons for the committee to think long and hard about still increasing rates. The newspaper headlines are currently awash with reports of record debt (as we reported yesterday) and the cost of buying a house is still on an upward trend.

The exposure of the consumer to record levels of debt means that they are highly exposed to any, as yet unforeseen global market forces. As the rate at which the consumer takes on more debt increases so is the likelihood that any increase in central bank rates will cause greater, and more rapid damage to the economy.

Whilst the Bank of England governor, Mervyn King may feel relaxed about the current state of the economy we worry that consumers are too extended and too dependant on non-wealth generating assets. Interest rates should move to a higher rate sooner to encourage a more mature long-term view from the consumer. Chancellor Gordon Brown is closely associated with the term ‘Prudence’ perhaps its time others where ‘encouraged’ to share his viewpoint.

House buyers once again shrugged off recent rate increases and sent prices up by an unseasonably strong 1.3 percent in September. Bringing annual growth to 8.2 percent according to the Nationwide’s figures released today. The rate is the highest since February 2005.

The consensus was that prices would see smaller increases of around 0.4 percent.

The average house price in the UK is now £169,413 – so to buy the average house you’d need to be earning £50,000 (UK average salary is £22,500).

Fionnuala Earley, Nationwide’s group economist said "Just like the weather, the housing market was unseasonably warm in September as August’s interest rate hike did nothing to cool the rate of house price inflation,"

"However, fewer sellers willing to put their properties on the market is adding to already squeezed supply which increases price pressure."

Buy-to-let landlord demand was particularly strong and looked set to support the market for some time to come, it said, especially amid strong demand for rented accommodation from migrant workers.

"Around two-thirds of existing landlords have plans to extend their portfolios and many have access to finance from gearing their existing portfolios," the Nationwide said.

Earley commented that she expected to see The Bank of England increase rates in November and that this, along with increases in utility bills would help cool the property market.

It’s healthy to see such comments from officers of a lender. Ironically Ms Earley’s previous words and warnings seem to have fallen on deaf ears at both the BoE and the government. With the BoE fixated on the CPI and the government focusing on creating a ‘feel good’ factor during the succession from Mr Blair to, presumably Mr Brown there is no chance that the government will rock the boat by precipitating a decline in house prices.

At the same time it was interesting to note that the buy-to-let market has been buoyed up by the demand for rental accommodation from the recent surge in immigration from mainland Europe. Most of these workers head for the cities (mainly London) so prices may continue to increase even as bank rates increase as well.

Don’t expect any interference from the government until after next summer.
 

With debt reaching saturation point in the UK it comes as no surprise to hear that Datamonitor have published figures showing the population owes a full one third of all outstanding unsecured debt across Europe.

According to figures from Datamonitor debt levels in the UK consumer credit market reached £214 billion, with the average Briton owing £3,175 against £1,558 average in Europe.

Paul Marsh, financial services analyst at Datamonitor, which carried out the survey said, "The difference between Britain and the rest of western Europe is striking and is a result of the UK’s insatiable appetite for credit. In contrast, many other major European countries have a culture of saving and frugalness, and countries such as France and Germany are particularly debt averse."

It was during the Thatcher years that UK credit markets were deregulated, which led to extensive promotion of both credit card lending and an increase in the amount of general unsecured loans. Generally, governments in the rest of Europe took a more ‘patrician’ view and restricted unsecured lending. Whilst in the UK the ‘buy now, pay later’ culture was promoted with vigour.

As a result credit cards account for nearly a 30 percent of all debt in the UK, but only 1.6 percent in France.

At the same time more recently, fierce competition between the banks in the UK has pushed more of them into promoting unsecured loans.

The UK government has started to take note, with a YouGov survey suggesting that nearly 1 million people had problems meeting obligations to debt payment each month. In the UK over 8million people (1 in 5 adults) have unsecured debts of over £10,000. Though whether this will result in constraints on lending is unlikely.

As the UK encourages more students to stay on and enter the higher education market the numbers of young adults in debt has increased dramatically as well. Twenty-five years ago 6 percent of the population went to higher education, now the figure is nearer 20 percent – and the old system of grants has been replaced by student loans. This year fees for colleges virtually doubled across the board, leading to further debt.

As we reported before, Citizens Advice has said that rising debt was its number one problem and called for government action on banks lending to families that were unable to afford repayments.

At the same time, mainland Europe is now starting to see debt rise as banks and consumer lending is gradually deregulated across Europe. With expectations of the same levels of fierce competition driving a lending frenzy that hit the UK.

The only good news for the UK is that debt has started to hit a saturation point. Though the worry is that any further increase in rates may exacerbate the current exposure people have as costs generally increase. The number of people at the cusp of financial insolvency is large indeed.

With oil prices falling below the psychological $60 mark and showing no signs of upward movement there are rumours that OPEC countries may be considering an across the board drop output ahead of Decembers meeting in Nigeria.

Clearly this is a bluff.

One of the problems facing the oil producing countries is that in many cases their respective government budgets have increased in proportion to their enriched oil revenues. Whilst it’s always easier for governments to spend more, it’s quite difficult to move government spending in the other direction without upsetting your populous.

So its likely that even though one of the bigger producers, such as Saudi Arabia may indeed cut back, the poorer nations with more volatile populous may actually need to increase production to make up for lost revenues. Of course all of this will be done very discretely and we’ll hear very publicly about the cut back. Ironically the more these nations produce, the lower the price, so the more they’ll need to produce.

Cartels like OPEC work well under certain circumstances, such as when prices are marching upwards. But tend to be less able to control in the short term as prices decline – it’s not a simple case of ‘who blinks first’ anymore.

At the same time, other external forces are weakening the cartels hand at the moment, the situation in Iran seems to be cooling, with the prospect of a more settled negotiations proceeding. Secondly, recent figures from the US show that the economy is cooling at the moment so demand will decrease, this will also have a knock-on effect with China. Finally, the hurricane season that has wrought so much chaos over the last few years is nearly over and has been much more benign this year – lowering worries about infrastructural damage to refineries and rigs.

The US is in better shape this year with better-distributed storage facilities and the predictions from meteorologists are for a milder winter this year.

All in all, the outlook for consumers looks good. With all the cards seemingly stacked against any upward movement more investors are pulling their positions and moving into other markets. At the same time the gearing of some of the hedge funds may precipitate a faster decline in prices as managers pull out as quickly as possible to quell losses. Certainly, many hedge fund managers will probably lose their jobs before the Christmas bonus season as fund returns collapse in that sector.

The resale values of existing homes fell for the first time in 11 years in the USA. At the same time the number of unsold houses on the market was the highest since current measures were put in place. The figures fully underlining concerns that the USA may be moving into a housing slump – and hence a potential recession.

The sales of existing homes slowed down to 6.30 million units in August 12.6 percent down on the year.

The Federal Reserve has recently justified its pause in interest rate rises by saying that weakness in the housing sector will put the brakes on growth and help slow down inflation. The latest numbers suggest that the central bank may soon start lowering rates.

Housing inventory levels rose 1.5 per cent to a 7.5 month supply at the current sales pace, compared with 6.3 months in July, and 4.7 months at this time last year. The inventory was at its highest since since condominiums were added to the survey in 1999.

While much has been made of the slow down in ‘starts’ it should be remembered that existing homes make up about 85 percent of the total market.

So it seems that the population has either run out of steam, or a combination of interest rate hikes and gas pump sticker shock has slowed down the pursuit of the American dream for a while.

Meanwhile across the water in Australia and in the other direction in the UK it seems that both countries will need a bigger short sharp shock to get the housing market to follow the US.

The Fed is now less likely to increase rates as the consumer boom, oil prices and house prices all seem to be cooling off rapidly.