You’d almost think the facts are in denial over the credit crunch gloom dominating the headlines.
In June, the OECD said it thought the UK economy would grow by 1.8% this year. That’s much slower than it has been in recent years, but it’s still a robustly positive number. And while we’re all supposedly sitting doing nothing in our increasingly worthless homes, retail sales data in May showed an accelerating growth rate compared with April.
But there is an increasing sense of unease that these figures are overly optimistic and that there is little chance that the forecasts will be revised upwards; rather, there is a strong probability they will be downgraded. As one London-based fund manager, who, for now at least, prefers not to have his opinions attached to his or his firm’s name, puts it, “The UK’s economy is cratering much faster than anyone has really worked out.”
While everyone knows that the UK’s economy is being squeezed by the credit crunch and rising inflation driven by the spiralling cost of commodities, there is a growing feeling that the full impact of these macroeconomic trends is still being underestimated and that all the risk is on the downside.
Hitting home
While the credit crunch is making itself felt around the globe, the effects are
particularly severe in the UK and the US where buoyant housing markets helped
consumers to feel disproportionately wealthy. Cheap, easily available debt
encouraged them to spend that additional equity.
But in today’s paranoid times, consumers are being affected directly and indirectly as banks are reluctant to lend not only to their customers but also to each other. As Dr Elizabeth Stephens, political risk analyst at Jardine Lloyd Thompson, says, “People already feel psychologically poorer than they did six months ago.”
Just how big an impact this is having was neatly illustrated by recent mortgage data from the Bank of England. The number of approvals for house purchases slumped from 58,000 in April to 42,000 in May, 64% down on a year ago. Mortgages are no longer like costume jewellery cheap and available on any high street they’re now like four-carat diamonds expensive and hard to find.
“Before normal lending practices can be resumed, the banks have to sort out their balance sheets,” says the fund manager. “In the US, the lower interest rates are facilitating this refinancing. In the UK, interest rates are simply too high so banks are forced to rebuild by rights issues alone. That means it will take UK banks two to three years to sort out their balance sheets and resume lending.”
Constrained bank lending for two to three years will have a serious impact on consumer spending and business expansion. There are already signs that business investment is starting to slow.
Retail in therapy
For now, though, the official data shows that the retail sector appears to have
shrugged off this slowdown in mortgage lending and the general ‘feel-bad’
environment. But most think this will be a short-lived trend and the numbers
will turn downwards in coming months. Matthew Sharratt, UK economist at the Bank
of America, says, “The buoyancy of the retail sector is unexpected and it’s not
a trend that can be expected to last.”
Others believe that the retail data is simply wrong. As David Bush, head of Grant Thornton’s retail services team, explains, “The data has been decidedly strange since March. In fact, I don’t think I’ve believed any of the numbers for the past three months. They have painted a much rosier picture than the one we get when we’re talking to real, live retailers.”
Need proof? As Financial Director magazine was going to press, Marks & Spencer executive chairman Stuart Rose revealed that like-for-like sales fell 5.3% in the past three months.
Other sectors of the economy are hurting. “There are a number of service sectors that are already contracting. Estate agencies, financial services and the construction industry are already under the cosh,” says Sharratt. Shares in housebuilder Taylor Wimpey, for example, more than halved on 2 July when the company announced that it had failed to secure extra funding and was making around 900 people redundant.
