The global credit crunch, and a supposedly =
impending UK=20
house price crash, have kept economics on the nation's front pages =
this=20
year. That will continue during 2008, as the world economy =
undergoes=20
seismic change.
For one thing, the credit crunch will get worse =
before=20
getting better. Western banks have bought around $1,000bn of=20
collateralised debt obligations - those nasty packages of =
securitised=20
sub-prime mortgages.
With US house prices falling and America's =
economy stalled,=20
a big slice of that debt will now default. Banks have so far =
admitted to=20
$90bn of losses. Almost two months ago, the US Federal Reserve =
predicted=20
the total would be $150bn - but the final figure will be double =
that. So,=20
in terms of "writing down" sub-prime loans, we're less than a =
third of the=20
way through.
In response to sub-prime, Western central banks =
have cut=20
interest rates. Policy-makers have been spooked by the ongoing gap =
between=20
base rates and market-driven interbank borrowing costs.
I've argued that cutting base rates is futile - =
as the=20
yawning spread with interbank rates reflects the lack of trust =
between=20
banks. That won't change until our leading financial institutions =
openly=20
quantify their sub-prime losses.
advertisement
UK and US base rates will fall further in early =
2008.=20
Expediency will prevail - driven by financially illiterate =
politicians and=20
doom-mongering City/Wall Street economists. And despite the =
European=20
Central Bank so far holding firm, eurozone rates will drop =
too.
But, as we've seen in recent months, base rate =
cuts aren't=20
normalising Western credit markets. And, I predict, during the =
first half=20
of the coming year, arguments for lower base rates will wear thin =
- with=20
the authorities pressing the banks to take the hit and generate =
lower=20
borrowing costs themselves by "fessing up" to sub-prime =
losses.
In other words, cash-strapped consumers will be =
granted=20
lower rates in 2008, but base rates will fall by much less than =
most City=20
economists predict. And that's a good thing.
Why? Because inflation is about to become a major =
policy=20
problem. In the UK, CPI inflation - at 2.1 per cent - is already =
above the=20
Bank of England's target. With inflationary expectations at an =
8-year=20
high, sky-high energy costs and more rate cuts to come, inflation =
could be=20
pushing 3 per cent by the spring.
This will be a global trend - driven not only by =
oil-prices=20
(see below), but higher food costs too. In 2007, wheat prices =
doubled -=20
with the price of other crops like cocoa and coffee also =
jumping.
Next year, the growing - and increasingly wealthy =
populations of the developing world will keep global food demand =
rising.=20
Global supplies - hit by more droughts, floods and the increased =
use of=20
land for bio-fuel production - will struggle to keep up.
That's why, in 2008, high food prices will =
replace=20
expensive oil as the bogeyman of Western consumers and central =
bankers.=20
Because food accounts for a large portion of disposable incomes,=20
escalating food prices will seriously dent consumer confidence =
next year,=20
while preventing deep base rate cuts.
That's particularly true in the US, where retail =
price=20
inflation soared to 4.3 per cent in November. And it's this =
combination of=20
falling house prices, sub-prime woes and high inflation which, in =
my view,=20
will drive America into recession next year - with the world's =
largest=20
economy contracting for two successive quarters.
As foreign investors try to sell (mostly=20
dollar-denominated) CDOs, the greenback will fall even more in =
2008. That=20
will aggravate US inflation (via dearer imports) making it even =
harder for=20
the Fed to cut rates.
Another reason America is so vulnerable is that =
too many=20
homes were built during the recent boom, which is dragging down =
property=20
prices now. Conversely, that's why the UK won't enter recession - =
because=20
an ongoing shortage of homes will, despite the lurid headlines, =
keep=20
property prices mostly firm.
Have=20
your say
Continued
1
2
3
Next=20
page
Post this story to: =
del=
.icio.us=20
|Digg =
|Newsvin=
e=20
|NowPublic=20
|Reddit=20
|Fark=20
Comments
The media like to talk up hype of recession and =
difficult=20
times ahead, but I would comment as follows. We have never been =
richer and=20
have a higher quality of life than we have ever had. Debt is a =
symptom of=20
the good times we have been experiencing and I think these good =
times are=20
set to continue. Developments such as the internet and electronic =
commerce=20
have boosted the economy, developments in genetic engineering and =
other=20
emerging technologies will boost the economy further. In terms of =
the UK=20
vast revenues are also generated by foreign investment and London =
is the=20
world's no 1 financial capital, managing vast amounts of wealth - =
this is=20
backed by our stable political climate and advanced laws and =
financial=20
system. Russia and China have emerged from nearly a century of =
communist=20
rule and are now contributing significantly to growth in the =
global=20
economy on a hitherto unprecendented scale. Additionally, despite =
some=20
problems minor problems with islamic extremists there does not =
appear to=20
be a foreseeable threat of major war or conflict =
emerging. Posted by=20
Professor William Farrell O Neill on January 1, 2008 6:47 =
PM Report=20
this comment
'year of living dangerously. We can no longer =
rely on=20
ordinairy assumptions of human behaviour. We need more than dismal =
economics, but terrible history to give us some light to look into =
the=20
future. Interest rates, inflation, house prices and supply and =
demand;=20
there is a lot of demand for houses in Eithiopea, Somalia but try =
finding=20
a mortgage from a warlord. The world will be shaped by =
geopolitical events=20
this year, civil war in Pakistan, food riots in China, Bird flu in =
Asia.=20
Middle East is the last place to book a holiday. Perhaps people =
should=20
invest in a pension and hope it is worth something to buy bread =
and coal.=20
This country needs to 'Reduce its dependence on imports =
(mostly=20
energy), Re-use its human talent by training for technology, =
re-cycle its=20
resources with 400 years of industrial era still with us, but most =
of all=20
innovate to the needs of a future with scarce resources....has it =
always=20
been the same?
The soverign wealth funds hold a bag of =
money,=20
dwindling in real value each sitting on a powder keg of social=20
instability, and have the desperation of drowning man attempting =
to get=20
into an unstable life boat....too much aggresive investment will =
sink the=20
very boat in craves. Posted by gold finger on December 31, =
2007 3:23=20
PM Report=20
this comment
"Finally, Liam - 3% inflation - so what. 4% - so =
what. 5% -=20
so what.
Economies can live easily with such inflation =
levels.=20
Hardly hyperinflation is it!
Better moderate inflation =
than the=20
utter disaster of 10% falls in the general price level, 50% falls =
in asset=20
prices, and worse, that we are headed for, if we are not very, =
very,=20
careful.
Posted by David Goldsby on December 30, 2007 9:20 =
AM"=20
Wrong about as much as wrong can be.
Zero interest =
rates=20
is simply a short-term fix to delay the inevitable crash. =
Why=20
shouldn't asset prices fall by 50% or other prices fall by 10%?=20
These current prices are built upon the quicksand of 10 - =
20 years=20
of cheap credit (UK debt =A31.3ish trillion).
Are China, =
Gulf States=20
etc. going to just sit on their hands as they see those IOU's =
inflated=20
away to nothing in a falling dollar?.
An interest rate of =
0% is a=20
declaration to those creditor counties that their IOU's are never =
going to=20
be redeemed.
They will simply charge a real price (i.e. =
not in=20
inflated US dollars) for the labour and raw materials they still =
have in=20
abundance and inflation will then be far higher than a blithe 3% =
or 4%.=20
Quite simply the debt has to be paid back and 50% and more =
reductions in asset values are a part of the price that we must =
pay.=20
No amount of Central Bank shenanigans is going to make =
this=20
monster go away and it demonstrates a quaint trust in the power of =
Central=20
bankers to believe they can do so. Posted by Steve on =
December 31,=20
2007 1:28 PM Report=20
this comment
It's aa economy build on a big mountain of credit =
that's=20
about to topple over!
Any fool can see that! Millions =
paying=20
mortgages with credit cards, houses overvalued.
Wages kept =
too=20
low. Inflation may be necessary evil to level this off. An economy =
based=20
on reckless credit spending as to come to an end sooner or later.=20
These brainy eggheads of the financial world need to =
discover how=20
to invest money into real assets.
Meanwhile the UK needs =
to get=20
back to manufacturing, even if its only cars that don't work.=20
Posted by Eugene Senwick on December 31, 2007 11:56 =
AM Report=20
this comment
A few points:
The USA has a multiple of =
2-3 times=20
of agricultural land per person compared to Europe, India or =
China.=20
Would these countries not only have to buy technologies =
(Microsoft=20
/ Google etc.) off the USA but also food?
Corporates in =
the UK are=20
no longer finding it a competetive place to be (tax and transport =
are the=20
biggest issues).
Despite being a corner stone of the UK =
economy,=20
financial services industries are more geographically boundless =
than they=20
have ever been.
The skills needed for banking are found in =
the=20
emerging markets as well as London nowadays.
If there were =
job=20
losses in London this would effectively move the work force away =
from the=20
UK.
All those forgieners in London are likely to go home =
and UK=20
skills move abroad freeing up plenty of housing.
A nice =
way to=20
manage inflation is to start by having a weak currency.
By =
strengthening your currency as inflation looks threatening you =
negate the=20
price rise of goods bought from abroad.
The opposite is =
true for a=20
currency that is looking to weaken.
Would a weak USD that =
is also=20
strenthening allow for US businesses to have affordable funding =
whilst=20
taking advantage of the the weaker currency. Posted by John =
Bower on=20
December 31, 2007 5:16 AM Report=20
this comment
Surely cutting interest rates makes oil futures =
better for=20
speculators than equities or property, and perhaps the Fed is now =
fuelling=20
the increase in commodity prices just as China did =
earlier Posted by=20
TomTom on December 31, 2007 5:09 AM Report=20
this comment
A good article. No man would accept that his =
house would=20
fall. So the writer easily moved the bigger shock to US and let UK =
take a=20
smaller blip. That's fine.
But for sure we are in =
Uncertain times.=20
Cross your fingers and watch the show. Posted by P Chidoo on =
December 31, 2007 4:35 AM Report=20
this comment
When you guys end your commentery, please provide =
solutions=20
as well.
Posted by amar duggal on December 31, 2007 =
3:42=20
AM Report=20
this comment
"Conversely, that's why the UK won't enter =
recession -=20
because an ongoing shortage of homes will, despite the lurid =
headlines,=20
keep property prices mostly firm." Where is your proof of a =
shortage? I've=20
heard this spouted many times but never seen anywhere quote proof. =
On the other hand - link states "The Home Builders Federation =
says that=20
since mid-2004, the stock of new properties has been more than =
adequate to=20
meet demand" Also anecdotal evidence such as static rents and =
increasing=20
numbers of empty flats point towards this. Posted by alex on =
December 30, 2007 9:40 PM Report=20
this comment
I agree with most of this. But, isn't an =
unexpected=20
hike in interest rates also entirely plausible? =
Posted=20
by gordong156 on December 30, 2007 9:05 PM Report=20
this comment
I don't think anyone has the faintest idea of =
what's going=20
to happen economically even over the next few weeks. The latest =
news of=20
the bail outs of high street chains by reducing rents and banks =
not=20
foreclosing until end of sale time shows how desperate events =
really are.=20
This is deflation red in tooth and claw.
And government =
can't=20
increase debt or taxes. No wonder it's embarked on the police =
state and=20
using the Office for National Statistics as a propaganda outlet =
worthy of=20
Goebells. To prove this, go to the home page and try and find =
average=20
earnings - no mention since the civil servants and police had =
staged=20
increases! Posted by Alexander Davidson on December 30, 2007 =
8:57=20
PM Report=20
this comment
The real wealth is with nations that have natural =
resources=20
rather than human ones.
China will eventually come a =
cropper when=20
it is undercut by another population. It's wealth lies in its =
ultra cheap=20
labour and ability to exposrt to larger consumer markets. =
Russia=20
has vast oil reserves, and unlike the Sheikhs is not fussy about =
buying=20
into other economies. Its oligarchs have no qualms, and must, in =
fact,=20
move their cash money into profitable businesses in the =
politically secure=20
West.
India is about education and technology and to a =
lesser=20
extent than China, human resources.
Of these, unless a =
viable new=20
fuel is developed during our current quest for alternatives, =
Russia has=20
the real power. China will dominate the labour markets for the =
next 10=20
years, as Hong Kong, Taiwan etc etc have done in their hey day. =
In=20
the meantime, these economies will accumulate enormous wealth, =
while=20
Western ones become lumbered by debt.
The UK? well we're =
being=20
lied to about inflation. Lower interest rates won't make =
difference=20
because lending will be radically monitored (no more 6x earnings =
etc). The=20
frenzied lending came off the back of the recovering economies of =
the late=20
90s when spare cash always translated to that easiest of =
businesses (by=20
the banks). Posted by Andy on December 30, 2007 6:30 =
PM Report=20
this comment
a great article.
for me, the UK economy's =
ability=20
to ride a tough '08 will lie with the property market re-alignment =
which=20
will surely soon ensue, and inflationary pressures in the high =
street=20
which are already simmering at the start of the supply chain. =
as a=20
start-up dependent on Far East manufacturing to produce consumer =
goods=20
ranging from gadgets to executive leather chairs, i can state as =
fact that=20
'07 saw 3 or 4 producer price increases of 20-50% - explained =
mostly by=20
the rise of oil prices, other commodity price hikes, and the =
depreciating=20
value of the US Dollar.
the real test is how the high =
street=20
brand-leaders can absorb this pressure given disposable household =
income=20
will be, undoubtedly, so much tighter in '08.
should be an =
interesting year!
( and how does the government make such =
a hash=20
of the budget deficit exactly?... it beggars bloody belief. )=20
Posted by 32parklane on December 30, 2007 5:18 =
PM Report=20
this comment
Inflation seems much higher than official US =
numbers. If=20
inflation is backed out of total goods and services produced, a =
recession=20
might have begun in November. High energy costs might further =
reduce=20
consumption in US and make economic recovery more difficult. =
Posted=20
by Michael J Birmingham on December 30, 2007 1:54 PM Report=20
this comment
Yes,Surely things are going to get worse in 2008. =
Let's=20
hope that 1929 is not repeated. Posted by krishna on December 30, 2007 12:29 =
PM Report=20
this comment
Dear Mr Hallagan I do enjoy reading your =
Economic=20
Agenda in the Sunday Telegraph. However I am disappointed that =
when=20
discussing the extremely important matter of inflation you quote =
the CPI=20
figures.We all know that these figures seriously underestimate =
inflation=20
and are Government propaganda to mislead the nation into thinking =
that=20
inflation at 2.1% is not a concern. The RPI number probably=20
understates the real increase in inflation but at least at 4%+ is =
a much=20
more accurate (and so more worrying) indicator. Yours =
sincerely R=20
P Harsant Posted by Ray Harsant on December 30, 2007 11:25=20
AM Report=20
this comment
The " decoupling " theory is seriously flawed, I =
cite the=20
US as a 9t consumer economy and China as a 1t consumer economy as =
the=20
reason , Chinas massive contribution to World GDP rides on the =
back of=20
Western Consumers, the workers/masses of the developing world =
earing 50=20
cents an hour arnt going to pick up the slack.
Thats m 2c =
worth=20
(>: Posted by Marco on December 30, 2007 10:33 =
AM Report=20
this comment
I would question two points in this otherwise =
sensible=20
analysis: (1) Inflation is not a danger in the immediate =
future=20
despite higher food and energy prices. If consumer credit =
continues to be=20
squeezed and pay rises are constrained by the threat of =
unemployment and=20
the squeeze on company finances, then higher food and energy =
prices have a=20
deflationary impact on other prices. General inflationary =
pressure is=20
thereby lowered. (2) Commentators always underestimate the=20
effectiveness of lowering the official lending rate because it =
takes time=20
to work its way through. It will take longer because of the bad =
debt=20
worries but these will in time work their way through. It is =
nonsense to=20
quote these total CDO exposure figures as though these debts are =
totally=20
worthless. Not all CDOs are completely worthless, only some part =
of them.=20
Uncertainty is certainly a problem but why assume the unlikeliest =
scenario=20
of zero recovery!
Posted by Robert Cookson on December =
30, 2007=20
9:38 AM Report=20
this comment
Usual nonsense. There is but one prime source of =
world=20
growth, Western consumer credit expansion, backed by sound =
property=20
collateral.
The investment boom in China is nothing but a =
paper=20
tiger without Western consumer spending, and the tap is about to =
be turned=20
off, big time, as the stock and investment cycles kick in. =
Either=20
base rates hit 0% very soon or a world deflationary crash will be=20
unavoidable, as Ambrose Evans-Pritchard has argued in these pages. =
Why, even Roger Bootle admitted in these pages just before =
Christmas, that unless the central banks drop their rigid low =
inflation=20
target myopia, we are doomed.
I think Liam must have spent =
too=20
much time talking to that prince of blind usury, Christopher =
Fildes. We=20
have reached the end game - reflate and save the existing economic =
and=20
political order, or crash and experience economic hell and the =
worst=20
political upheaval since communism and national fascism. Do they =
never=20
learn? Same old usury, same old political disasters. Just watch =
the EU=20
implode if they keep getting this wrong, and much as I detest the =
EU, this=20
sure isn=92t the way to want it killed off.
I tend to =
agree with=20
most economic commentators, that the central banks and Governments =
can see=20
this now imminent risk and are not about to let it happen, =
assuming it is=20
not already too late. National security comes into this in a very =
serious=20
way. In a deflationary crash, cash in king, and potential enemies =
have the=20
cash to buy up deflated western assets in a very big way; they =
have=20
already started.
Finally, Liam - 3% inflation - so what. =
4% - so=20
what. 5% - so what. Economies can live easily with such inflation =
levels.=20
Hardly hyperinflation is it! Better moderate inflation than the =
utter=20
disaster of 10% falls in the general price level, 50% falls in =
asset=20
prices, and worse, that we are headed for, if we are not very, =
very,=20
careful.
Posted by David Goldsby on December 30, 2007 =
9:20=20
AM Report=20
this comment
Missing from this insightful analysis is the big=20
impacts of Northern Wreck's inevitable nationalisation at =
a cost=20
of =A350bn+. Spiraling local government spending driven by=20
uncontrolled migration at NuLabour social engineering. A =
decline=20
in the strength of the British Pound to the US Dollar which =
will=20
magnify the inflationary impact of ballooning commodity =
prices. A=20
huge reduction in the tax take from Financial Services. Siren=20
headlines from record levels of indebtedness that cannot be =
refinanced=20
because of the closure of the financial markets. Finally, =
the=20
unknown strategic impact of Sovereign Wealth Funds in 2008. =
I=20
believe that we could well see Gordon Brown's Prudence loosing =
a vote=20
of no confidence by the end of the year and a forthcoming =
British=20
General Election. Posted by Mike Donnellan on December =
30, 2007=20
8:44 AM Report=20
this comment
A very good article. The only point I really =
disagree with=20
relates to UK house prices. I think that unemployment will rise as =
the UK=20
becomes less competitive and as the financial sector is hit. This =
will=20
cause house prices to fall significantly, athough this may wait =
until=20
2009.
From what I have read on peak oil it is already =
here, that=20
is 'peak cheap oil'. There is still plenty of oil, but most of it =
is=20
probably several thousand metres under the seas, as with the =
recent find=20
off the coast of Brazil. These types of discoveries require the =
latest=20
technology and high oil prices to make them viable. High prices =
are here=20
to stay and soon $100 oil may look reasonably good value. =
One=20
final point: high inflation is coming and it is going to be very=20
interesting to see how Governments and firms deal with this is in =
wage=20
negotiations. Posted by D Rumsfeld on December 30, 2007 3:54 =
AM Report=20
this comment
Post a comment
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