Some Business News as at 2008 12 23
The great fight back begins
It began in Northern Ireland, in towns like Enniskillen, Co Fermanagh. The means by which the UK economy can recover have been laid. Hands up all residents of Britain who wish they were paid in euros. Envy those who are. If you receive your salary in euros then you have received an effective 25 per cent pay rise over the last year or so. It’s bad news if you enjoy a regular holiday in Europe every summer. It’s bad news if you take the ferry to France every now and then, and return topped up with cheap booze. But if you want to see the UK economy move onto a sustainable footing, it is time to at last think about celebrating.
This morning, the BBC reported on booming sales on the high streets of Northern Ireland, especially retail centres near the border, as shoppers with wallets bulging with euros make their pilgrimage to the North. The big snag, of course, is that the eurozone is in a mess too. How can we expect to see trade surge to countries that are, like the UK, just on the brink of recession?
Well, the answer is pretty simple really. Alistair Darling tries to boost the economy by knocking two and a half percentage points off VAT. Retailers try to increase sales by painting the High Street red with ‘Sale’ signs. Why bother? Forget about shaving a few percentage points here and a few percentage points there. Instead, sell to our European cousins – ‘25 per cent off last year’s prices.’ If budget retailers are among the few retailers in the UK that are thriving, then why can’t budget Britain thrive on the European High Street?
A part of the problem is that for the last decade or so the major economies of the Eurozone have not been doing their bit. The UK is the Eurozone’s main export market. The Germans may scoff at our spend now–pay much later approach to shopping; the philosophical French may feel bemused by the way we worship at the altar called the High Street, praying for more retail therapy. But if it wasn’t for our reckless spending, the French and German economies would have seen even lower economic growth this decade.
Germany, with its massive trade surplus, has been the big beneficiary of Anglo-Saxon exuberance, and now its finance minister tries to bite the hand that feeds it by laying into the Brits with their plans for big fiscal stimulus.
At last, governments in the two countries are waking up to reality. According to Spiegel Online, the German government is set to announce new plans to kick life into the German economy. According to the magazine, the German administration is planning a fiscal boost worth two per cent of GDP. Chancellor Angela Merkel is even reported to be mooting an extra budget early in the New Year.
It seems inevitable the French will follow suit. Even the IMF is begging them to do it Curiously, Dominique Strauss-Kahn, the top man at the IMF, wants to see a big world-wide fiscal stimulus of at least £1.2 trillion, or 2 per cent of global GDP. “The problem is that the whole society is going to suffer,” he told the BBC in a radio interview. He added: “I’m especially concerned by the fact that our forecast, already very dark… will be even darker if not enough fiscal stimulus is implemented.”
Yet, bizarrely, he is worried about the level of the UK’s debt, calling the surging British public deficit disturbing.
The reality is that it isn’t Britain which should be throwing money at the world at all. The British did this for ten years. Now it’s the turn of the French and the Germans.
But whichever way you look at it, British exporters are set to boom. If the French and German economies stay in the doldrums, then they will want bargains more than ever, and the cheap pound means there will be plenty of British bargains. The real irony is that while it is debatable whether the fiscal and monetary stimulus in the UK is akin to giving a drunk an extra drink, in Germany and France the economics case for such measures is very strong indeed. “We used to believe you can spend your way out of a recession,” said James Callaghan in 1976. ”I tell you in all candour that option no longer exists.” Well, the words the labour prime before last spoke may be true today, when applied to the UK, but they are not true to France and Germany where the real problem has been too little spending for some time.
Assuming the Eurozone does eventually recover on the back of government spending, the UK export boom will then gather a new momentum. The question though is what can we export to Europe? The real snag is that the UK infrastructure is just not geared to exporting. And that is why Mr Darling’s move to cut VAT was such a disaster. The UK’s problem was too much emphasis on spending, and not enough on selling abroad. So what does Mr D do? He tries to boost UK spending. Instead, the money he gave away though this tax cut should have been made available to British exporters and would-be exporters.
The media and some politicians lament the fall in the pound. Instead they should be cracking open the sparkling wine and celebrating – it is just that they should make sure the sparkling wine is made in Britain.
Housing market recovery could be ten years away, and prepare for boos and hisses aimed at banks
The most bearish comment yet from a leading economist; an extraordinary criticism made by the presenter of the Channel Four programme Location, Location, Location; an even more extraordinary and quite disturbing move by a well known High Street bank; and news on a panacea to the housing crisis, were the big four developments to have occurred in relation to the Great British Housing Crash this weekend. Tim Drayson, an economist at Legal & General has warned that the great housing downturn of our times could last for ten years, in total.
This morning’s Telegraph quoted the economist as saying: “It will be at least 10 years before we see prices return to their 2007 peak levels.” Oddly though, his bad news came with a hint of good news. While he reckons the downturn will be ten years in duration he believes prices will fall only by 30 per cent in total. Or, to put it another way, we are now around the half way point in terms of price falls. That may not seem like good news, but there is a growing number of economists who expect even bigger falls than that.
There is one important and often overlooked difference between today and the early 1990s crash. The Halifax produces data showing the relationship between average house prices and average income. What is strange is that this ratio bottomed out in 1999, several years after house prices had started to rise. It is just that back then we had inflation – inflation was modest, but it was inflation nonetheless. So, while prices crashed, wages went up, exaggerating the fall in the average house price to average income ratio. So, one can only really say the recovery was truly on the way at the end of the last decade. As dotcoms crashed, it seems the housing market began its own boom and bubble, but no sooner than that. But, if you believe this time around we are set for deflation – and that ultimately wages may even fall – then that has quite startling implications.
Let’s assume the housing downturn mirrors the last one and it takes ten years for the ratio of wages to house prices to fall to its minimum level. If wages are falling, that would mean house prices would be falling too.
All of a sudden, Mr Drayson’s comments seem quite optimistic. That just goes to illustrate how important it is that deflation is not allowed to set in. Meanwhile, Kirstie Allsopp of Channel 4’s Location, Location, Location, was reported in The Times for laying into the web site housepricecrash.co.uk. She feels the web site is making money out of people’s misery, and called it sick.
There is just one snag with that argument. The media, and her own Channel 4 programme was very much a part of this, probably did more to talk house prices up to create the view that house prices only ever go up, and in the process create an unsustainable bubble, than anyone. So, any property bull who criticises those with a more pessimistic view on the housing market, should perhaps remember what is said about people who live in glass houses. Meanwhile, media reports have been circulating about one couple who have been threatened by their bank with repossession, and they haven’t even missed a single payment. Apparently they took out a top-up mortgage to pay off credit cards, etcetera, and now the bank has given them a week to repay the loan. The bank said: “… after ‘reviewing’ their arrangement it was withdrawing the mortgage,” adding: “We assure you that we have only reached this decision after careful consideration. However our decision is final and we are not prepared to enter into any discussion in relation to it.” The bank in question is the Royal Bank of Scotland. Now, we have not yet heard the other side of the story, so let’s not be too hasty to draw conclusions, but if this story proves to have any meat in it, expect the most massive consumer anti-bank backlash seen yet.
Finally, The Royal Institution of Chartered Surveyors wants the government to use the 762,635 houses it says are not being used, to offer to people on social housing waiting lists. Apparently there are 1.7 million people on social housing waiting lists. It is funny, isn’t it. There is supposed to be a shortage of homes in this country. That is why many were arguing right up to the last second that house prices would never crash in the UK. Those same people say that come the economic recovery, house prices will surge again. But it is a little difficult to square those claims with talk that, right now, there are around three quarters of a million homes going empty.
China and Japan: the contagion spreads – and free trade is the only possible solution
In China, unemployment is the challenge, social unrest the big worry. In Japan, it seems exports are falling off the edge of a cliff. News that Toyota is now forecasting its first annual loss since the 1930s sums up the whole thing pretty well.
The real danger, however, is that the world retreats behind protectionism. That will surely be the single biggest threat in 2009. According to this morning’s FT, the Chinese government is making tackling unemployment its number one priority.
Apparently 10 million migrant workers have lost their jobs, and almost half of that number have returned home. Meanwhile, it is thought 1.5 million Chinese graduates are looking for work, and their number could swell next year as the next batch of graduates finish their degrees.
China’s problem is that it needs to grow, and it needs to grow rapidly just to stave off unemployment. That may seem bizarre, but as productivity rises, economic growth must rise too. The sum is simple. Say labour becomes 10 per cent more productive. Then output must grow by 10 per cent too, just for the jobs stats to stay still. Economists are now predicting growth in China will slow, perhaps to as low as 6 per cent. That is China’s challenge.
Mind you, despite the problems at China and the other BRIC nations, the ITEM Club from Ernst and Young reckons China is now just ten years away from being the world’s richest nation. The credit crunch has hit the US so hard that it now is forecasting the time when China’s GDP at purchasing power parity will be greater than the US, and this is coming eleven years sooner than it previously estimated. Meanwhile, in Japan, exports fell by the equivalent of 27 per cent a year in November. Exports to Asia saw their biggest fall since 1986.
The Japanese trade account has now been in deficit for two months in a row. As for the car maker in front, well, even Toyota is wilting. It has now forecast its first annual loss since the year of the company’s formation, 71 years ago.
The soaring yen, and falling global demand, means the company now expects to sell 4 per cent fewer vehicles than it previously said. Japan has been in the dog-mire now for getting on for two decades. In a way, the Japanese crisis which began at the end of the 1980s has affected us more than is commonly realized.
If the real underlying problem behind the credit crisis has been global imbalances, then the Japanese lost decade or two were an important part of that mix. The world’s second largest economy was selling to the rest of the world, but not buying. It was the same, too, with the world’s third largest economy, Germany. Now the world needs Japanese consumers to start spending. But they haven’t done this for twenty years, so who is to say they will start now?
What the global economy requires is a global fiscal and monetary push. It especially needs to see this in the world’s big trade surplus countries. The danger is that the push is coming from the countries already in deficit. Or in other words, it is back to front.
There is real danger lurking, though, and if this is realized, things could get a whole lot worse. The spectra of protectionism is lurking. What the world now needs is to see readjustment, as exporters start importing more. Instead, we see the call for protectionism grow. From the US, where the cheap value of the yuan is held up as the cause of all ills, and moves to save its indigenous car industry; to France, as it tries to hide behind its new Maginot business line; and to China, as it attempts to shore up the job market.
What the global economy needs now, more than anything else, is a new, and this time successful, round of trade talks. This has to be the big priority for 2009.
Crisis deepens in Japan and China as Asian exports plunge
By Ambrose Evans-Pritchard 2008 12 22
Japan's exports plunged 27pc last month in the steepest fall for half a century. The shock data came as the Japanese Cabinet Office warned that the world's second biggest economy is now deteriorating at an "exceptionally high pace". Shipments collapsed to almost all markets in North America, Europe, and Asia, following a pattern already set in recent days by South Korea, Taiwan, and China. Thailand on Monday said its exports fell 19pc in Novermber. It is unclear to whether the violent drop is distorted by a "one-off" inventory shock as companies slash stocks, or whether it is the start of a trade slump that threatens Asia's entire export strategy.
"We think this is very serious," said Stephen Jen, currency chief at Morgan Stanley. "These export surplus countries are super-leveraged to the West, and now we're seeing a multiplier effect (in reverse) as the intra-Asian trade model is stress-tested. What's incredible is that Japan has run a trade deficit for two months in a row despite the fall in oil prices. The next country to watch is going to be Germany," he said.
The Baltic Dry Index measuring freight rates for bulk goods has crashed by 94pc since peaking in June. Container shipping for manufactured goods has been less volatile but that too has begun to buckle. Denmark's Maersk and China's COSCO have both cut container rates from Asia by a quarter. Importers have been struggling to secure letters of credit, the lubricant of the trading system. Even large banks in Asia have had trouble obtaining dollars needed for shipping deals.
Masaaki Shirakawa, the Bank of Japan's governor, said the central bank was preparing to buy corporate debt and commercial paper in an emergency move to unlock the credit market. It cut interest rates to 0.01pc on Friday, tantamount to zero.
"It's an exceptional step," he said, insisting that the authorities were taking on private credit risk with great reluctance. The bank is boosting its purchase of governement bonds from ¥1.2 trillion to ¥1.4 trillion ($156bn) per month in a return to quantitative easing.
In China, the central bank cut rates for the fifth time since September to 5.31pc and trimmed the reserve requirement for lenders. The Govenrmment is rushing through a $585bn fiscal stimulus package.
Beijing is alarmed by outbursts of civil unrest, both in the country's hinterland as 9m of migrant workers return after losing their jobs, and in the export hub of Guangdong where violence has been simmering for months. Some 3,600 toy factories have already closed this year.
Premier Wen Jiabao said over the weekend that the key priority is to find jobs for migrants and some 6m fresh graduates -- the two groups most feared as a political tinderbox. "If you are worried, I am more worried than you," he told students.
Japan's economy minister Kaoru Yosano said Tokyo is mulling a range of drastic measures to support the economy, including the outright purchase of equities held by banks in distress. "We're ready to do everything we can to break the cycle of deterioration in sentiment," he said.
The Cabinet Office warned that the surge in the yen against all major currencies was now tightening like vice on Japan's economy. "The tempo of the economic downturn is getting substantially faster, and what's worse there are many negative factors that can make a recession deeper and longer," it said.
The yen has appreciated by a third to ¥89 against the dollar since the credit crunch began. There has been a dramatic reversal of the "carry trade" as hedge funds close worldwide bets that were financed at near zero rates in Tokyo. Japanese investors began to repratriate their vast foreign holdings. It has doubled in value against sterling.
The surging yen has played havoc with the balance sheet of Japan's leading exporters. Every one yen appreciation against the dollar and euro shaves Toyota's profits by $450m. The company is now underwater, facing its first loss since 1938.
The risk is that Japan could slide back into a deflationary crisis and renewed perma-slump. The country's `Lost Decade' never seems to end.
Fears for 40,000 jobs in British car trade as Toyota goes into red
Leo Lewis in Tokyo and Tom Bawden 2008 12 23
A further 800 jobs in Britain’s car industry were put at risk yesterday after Toyota Motor, the greatest example of Japan’s postwar economic miracle, warned that it will go into the red for the first time since 1941. The possible job losses – 15 per cent of Toyota’s UK workforce – would add to the 40,000 positions expected to be eliminated from the UK car industry’s 200,000 over the next three years, as sharply declining demand for its cars is likely to trigger redundancies across Toyota’s business.
Toyota, which analysts universally believe to be the most innovative and efficient of the leading car companies, makes the Auris, the Avensis and Corolla models at its plant in Burnaston, Derbyshire, and manufactures engines at its Deeside factory in North Wales, which employ 5,250 people. Toyota, which decided recently to halve the number of shifts on its Auris production line and will close its Burnaston plant for four weeks over the next four months, follows a string of carmakers in announcing moves to cut costs.
Vauxhall’s owners are in talks with trade unions over pay cuts and a four-day week and has offered nine-month sabbaticals to thousands of workers at its Ellesmere Port factory in the North West of England.
Tata Group, owner of Jaguar Land Rover, is negotiating a government bailout worth tens of millions of pounds to enable it to pay suppliers, while Honda’s plant in Swindon will be mothballed for February and March. BMW’s Mini plant in Cowley, Oxford closed ten days ago for an extended break of a month and has shed 300 agency staff, while Ford’s Transit van factory in Southampton has closed for four weeks instead of the usual one.
Analysts in Tokyo predict that the cost savings at Toyota, which recently dethroned General Motors as the world’s largest carmaker, would send a shockwave throughout the extensive “food chain” of industries that keep Toyota’s industrial engines running across the world. Katsuaki Watanabe, Toyota’s president, described the situation as “an emergency of a sort we’ve never experienced before”, adding that there was no way to see an immediate end to the crisis.
Professor Garel Rhys, of the Cardiff Business School and president of Cardiff University’s Centre for Automotive Research, said: “Every single car market in the world is down, signalling it’s a depression not a recession. This year is terrible, next year will be even worse. The last time the North American, Japanese and European car markets were all in recession at the same time was in 1945, which was hardly a normal year.” Professor Rhys also predicts that the sale of vehicles in the UK, which stood at 2.4 million units last year, will fall to 2.1 million this year and to 1.6 million in 2009.
Kota Yuzawa, an analyst at Goldman Sachs, is now predicting global auto demand to fall between 15 and 20 per cent over the next few years, with potentially dramatic reviews of production systems by leading manufactuers.
Toyota has not made any of its permanent staff redundant yet but it has cut an unspecified number of temporary workers. The group promised to do all that it could to retain permanent British workers but could not rule out the possibility of redundancies. A Toyota spokeswoman said: “The times are changing so fast that it’s difficult to predict what will happen even in the next two months.” Toyota’s bleak admission is a double-punch to markets as they approach the last few trading sessions of the year, and the company’s full-year loss – unprecedented since the company stopped making looms and turned its hand to carmaking – is expected to reverberate throughout Japan. “We have lived our whole lives knowing only a situation where Toyota makes money,” the senior executive of one Nagoya-based car dashboard maker told The Times. “This changes our whole world.”
Ray Kishor, a former consultant to the car industry and now an analyst, says the lesson from Toyota’s rapidly declining fortunes is that it leaves little hope for the rest of the industry. “Clearly nobody is immune to the collapse in consumer confidence and the weakening economy.”
Sir John Gieve admits Bank underestimated crisis
Gráinne Gilmore 2008 12 23
The Deputy Governor of the Bank of England admitted yesterday that the Bank had underestimated the severity of the economic crisis after failing to spot the danger of the consumer borrowing binge and soaring house prices. Sir John Gieve, deputy governor for financial stability, said that although the Bank had forecast a correction after seeing “some crazy borrowing” and unsustainable rises in some asset prices, such as house prices, it had not foreseen the depth of the downturn. Average house prices rose 227 per cent between 1995 and the peak of the market in summer last year, figures from Halifax show, while UK consumers have run up debts of £1.4 trillion. “Why didn’t we see that it was so serious? I think that’s because we, perhaps, hadn’t kept pace with the extent of globalisation,” he said.
Speaking to the BBC, Sir John, who is stepping down as Deputy Governor in March, also called for additional tools to help to avoid a similar crisis, calling interest rates “a blunt instrument”. “We need to develop some new instruments, which sit somewhere between interest rates, which affect the whole economy . . . and individual supervision and regulation of individual banks,” he said. Sir John also said the UK banking system had been on the brink of collapsing before the Government stepped in with a multibillion-pound bailout. “I think we came right to the brink,” he said. “Several of our large banks . . . were in real difficulty.” RBS and HBOS were identified later by the BBC as banks that came close to collapse.
The admission came as the head of the OECD launched a scathing attack on policymakers and central banks, saying that there had been “a truly scandalous failure of regulation” in the crisis. Angel Gurria also said that the global economic downturn could cost 25 million people their jobs.
Sir John’s comments sent the pound tumbling to a record low against a basket of currencies as expectations rose that the Bank will make more aggressive rate cuts in the new year. Tim Besley, another member of the Bank’s rate-setting committee, indicated that more rate cuts are needed to offset the threat of deflation next year. The Bank has forecast that inflation will fall well below its own 2 per cent target next year and fears are growing that it could dip into negative territory. Economists expect rates to be cut to 1 per cent, falling even lower during the year. Sterling fell to 75.7 on the trade-weighted index, the lowest level since the series began in 1990, and remained near record lows against the euro at €1.05.
Sir John defended the Bank’s failure to curb the consumer credit binge by raising interest rates, saying that such a move could have inhibited growth elsewhere in the economy. “We would have been . . . holding down the level of employment and people would have said this is a wilful reduction in the prosperity of the country,” he said.
Crunch ‘to hasten rise of China to No 1 spot’
Robert Lindsay 2008 12 22
The credit crunch will ensure that China becomes the world’s largest economy within a decade, up to 11 years earlier than previously expected, it is forecast today. As the developed world grinds close to a halt, China will become the biggest economy, excluding currency fluctuations, by 2019, according to the Ernst & Young ITEM Club. Previous forecasts had predicted that China would not reach this point till 2025-2030.
Brazil, Russia, India and China, the “Bric” nations, will account for 40 per cent of global economic growth between next year and 2020, according to ITEM. Of this, China will account for a quarter.
Although economic activity in Britain, Europe and the United States is forecast to slow, or shrink in some cases, China’s growth is not tipped to go below 6 per cent a year, implying quicker catching up with the US.
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