Articles from April 2009



Flu pandemic could wipe 7pc off UK economy, warns Bank

A flu pandemic could wipe more than 7pc off Britain’s economic output, and trigger the worst recession since the early 1920s, according to Bank of England calculations.

Not only would it cause a permanent dent in Britain’s economic growth, it would see such significant losses to banks that it could trigger further bank nationalisations. It could also be a fatal blow for insurance groups.

However, Bank insiders said that with the financial crisis having already struck the economic and banking system, some of the hit to activity may already have been absorbed by markets and consumers.

However, other analysts have warned that the impact would be even more fierce coming at a point when the economy and banking sector are already so fragile.

The figures come from an exercise originally carried out by the Bank before the financial crisis two years ago. Fearing that a pandemic related to avian flu was one of the possible risks for the City, the Bank and Treasury carried out an unprecedented simulation with banks and firms.

The projections are based on 25pc of the population falling ill as the pandemic attacks the UK in two waves, in line with the Department of Health’s planning assumptions, which still stand. But they were also made at a time when banks’ balance sheets were particularly fat, so they may exaggerate the scale of the decline.

The exercise concluded: “The most immediate effect would be financial market turbulence, as investors assessed the potential economic impact. Growing absenteeism could affect operations at major financial institutions and infrastructure providers.

Over time, credit losses for UK banks could increase as a contraction in activity, both domestically and abroad, leads to financial distress among households and companies. Banks’ incomes would also fall as a result of lower lending volumes and financial market activity.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Stock markets in Asia remain under pressure

Stock markets in Asia, already buffetted by concern over an outbreak of swine flu, remained under pressure after a report that Citigroup and Bank of America will need billions of dollars of new capital.

The Wall Street Journal reported today that US regulators have told Bank of America and Citigroup that early results of the stress tests show they may need to raise billions of dollars in new capital. Banks across Asia fell, with National Australia Bank declining 3pc.

“You’d think that most banks could pass the stress tests, but if even these two fail, what it tells investors is that the situation could get much worse,” Chris Leung, a portfolio manager at Taifook Asset Management in Hong Kong, which oversees $500m, told Bloomberg.

Elsewhere, Ping An Insurance, China’s second-largest insurer, sank 9pc after reporting a drop in profits. JFE Holdings, Japan’s second-biggest steelmaker, fell 5.4pc after US Steel reported a bigger-than-expected loss.

Fears of a swine flu pandemic produced a rollercoaster day on global markets yesterday, triggering a sell-off in airline, hotel and holiday company shares. However, shares in pharmaceutical companies remained in demand.

In Tokyo, Chugai Pharmaceutical, which sells the antiviral drug Tamiflu, rose for a second day in Tokyo on speculation a swine flu outbreak will boost drug sales.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Risk aversion trades take centre stage

Swine Flu continues to dominate wise money chatter.

Unfortunately it is the unknown that is causing the problem rather than anything definite and until we know whether the infectiousness of the virus, which originated in Mexico, can be contained by the World Health Organisation then we won’t be sure of the financial impact.

The death toll in Mexico has risen to 149 and the WHO has upgraded its alert level to phase 4, one stage below the much more serious pandemic category. Phase 4 was the level at which the latter stages of the SARS outbreak was categorised.

Initially the Mexican Peso and the Antipodean currencies were hit hardest but concerns remain that if the situation worsens then sectors other than just agriculture will be affected.

The mediterranean countries are earmarked as likely targets (Portugal, Italy, Greece and Spain) with a downturn in air travel and tourism at a time that these countries can least afford it.

The Euro slipped sharply, not only on the move into Dollars but also following comments from ECB members Nowotny and Trichet. The former stated that Eurozone rates would stay low for a long time and that the Central Bank was ready to use additional measures if necessary.

Trichet reinforced this message saying the ECB will take decisions on new measures at their May 7th meeting- for the next week or so, the Euro is vulnerable all round.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Swine flu fears may hit airline and hotel shares

Travel and hotel groups are braced for a turbulent ride today as markets react to fears over the strain of swine flu that was reported to have killed up to 71 people and closed much of public life in Mexico at the weekend.

Analysts said that the news would revive memories of the 2002-03 severe acute respiratory syndrome (Sars) outbreak. Although the disease, first noticed in southern China in November 2002, was short-lived, it caused the deaths of 774 people worldwide and had a devastating impact on the Asian economy — particularly in Hong Kong — and on the shares of many international companies with an economic interest in the Far East.

In Asia, dealers said that any sell-off was likely to be in airline and travel-related stocks until more was known of the extent of the danger posed by the disease and its probable impact on global trade.

One dealer said that markets were likely to reassess their stance if more countries followed Russia’s decision yesterday to ban meat imports from Mexico, some parts of the United States and several South American countries.

Fund managers played down the risks of a swine flu-related sell-off, saying that Asian markets were used to the threat of potential health scares and were more cautious about moving too soon after reports of new disease strains.

Weekend reports in Tokyo suggested, however, that two of Japan’s biggest travel agencies had cancelled package tours to Mexico before Japan’s “Golden Week” holiday season, which begins on Wednesday.

Viewed by travel agents and airlines as the most lucrative seven days of the Japanese year, Golden Week travel activities by the Japanese are critical to many destinations that rely heavily on tourism income.

The mass cancellation of flights to Mexico will be a heavy blow to airlines, though travel agents said that it would be far more significant if Japanese holidaymakers cancelled flights to America as well.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

UK Budget 2009- Britain’s debt will not be under control until 2032

The unprecedented burden of UK public debt built up by Gordon Brown will not be brought under control for nearly a quarter of a century, economists have said.

”Debt freedom day”, when the national debt returns to sustainable levels, will not be reached until 2032 – another 23 years away, the respected Institute for Fiscal Studies said.

Families could soon find themselves paying at least another £1,400 a year in tax as part of the Government’s attempts to bring public debt back under control, the IFS predicted.

It said there was a gap between the amount of money that would be raised by the tax measures in this week’s Budget and the amount the Government will need to fund its spending plans.

This secret “blackhole” could end up adding another £1,430 each year to the average families’ tax bill, it said.

The stark warning of a generation of austerity ahead came as Alistair Darling admitted he could not be sure his optimistic forecasts for a quick economic recovery would be realised.

“It is very difficult to be absolutely certain as to what will happen,” he admitted.

The Chancellor’s predictions for growth to resume by the end of this year and to reach boom levels again by 2011 have been widely questioned, with the International Monetary Fund suggesting the British economy would actually shrink next year – despite Mr Darling’s forecast of modest growth. “The crisis is far from over,” it said.

The IFS warned that despite the tax rises and spending cuts announced in the Budget this week, future chancellors would be forced to raise even more money to fill a “breathtaking” long-term hole in the public finances.

The scale of the problem is so great that even with years of tax rises and spending cuts, the national debt will not be low enough to meet Gordon Brown’s now-abandoned “sustainable investment rule” until 2032.

This “golden rule” dictated that Government debt should not rise above 40 per cent of Gross Domestic Product (GDP).

In the Budget however, Mr Darling said he would borrow another £700 billion over the next five years, pushing the accumulated stock of Government debt to £1.4 trillion, equal to almost 80 per cent gross domestic product.

The golden rule on borrowing, which Mr Brown actually announced when he was Chancellor, has been “temporarily suspended” as the UK economy endures the worst recession for 60 years.

Mr Darling has set out plans for debt to peak at 76.2 per cent of GDP in 2013/14. Paying the interest on that debt could cost as much as £58 billion a year by then, more than annual spending on schools in England.

Bringing the debt back to the level Mr Brown once said was necessary for economic stability will take another 23 years, according to Carl Emmerson, an IFS economist. “Public debt will remain high for a generation,” he said.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Alistair Darling’s UK Budget derided as fantasy

UK’s Alistair Darling’s 2009 Budget has been derided as a stew of unrealistic forecasts and missed opportunities, after the labour Chancellor conceded the current slump is comparable with the Great Depression but insisted it would be over by Christmas.

Mr Darling cemented his reputation as the Chancellor with the worst forecasting record in modern history after he slashed his projection for British economic output this year to -3.5pc.

Unveiling the biggest increase in government borrowing since the Second World War, he conceded that Britain’s national debt will double to around £1.2 trillion in the coming years, and that the budget would not return to balance until 2018 or later.

In what economists described as a “fantasy Budget”, Mr Darling imposed swingeing new taxes on those who earn more than £150,000, which will raise as much as £5.5bn a year by 2012 – one of the biggest per-capita tax increases in recent history.

But while he will try to trim some departmental budgets, he will nevertheless increase the total amount the labour Government will spend this year and the next by £37.6bn. This indicates that if he does intend to balance the nation’s books, he will do so not with spending cuts but with tax rises.

However, the proposed tax and spending measures pale into insignificance against the scale and extent of the economic and fiscal crunch mapped out in the Budget small print.

The documentation reveals that this year’s economic contraction will be the worst in any year since the end of the Second World War. Indeed, according to the International Monetary Fund, this year is likely to be the worst since the 1930s, as countries around the world slump into a synchronised slowdown.

The Chancellor predicted that despite shrinking by 3.5pc this year, the UK economy would start growing again “towards the end of the year”, with 1.25pc growth next year and 3.5pc from 2011 onwards. Last night economic historians were trying in vain to find examples of developed countries that had stomached so significant a one-off drop in growth and yet managed to recover within 12 months.

As the IMF pointed out last week, recessions associated with financial crises tend to be more protracted and virulent than almost any other type, and that is precisely what the UK faces.

Indeed, alongside many City economists, the IMF expects the UK economy to shrink by a further 0.4pc next year – significantly below even the Chancellor’s revised forecasts.

Dig a little deeper into the Budget and it becomes clear that the Treasury expects nothing short of a full-scale consumer recovery – if not boom – in order to satisfy its projections. Such a prospect seems unrealistic if not outlandish, according to City experts.

“It’s just wishful thinking,” said Peter Spencer, chief economic adviser to the Ernst & Young Item Club. “It’s impossible to find a period when that sort of recovery has actually come through … If you believe that, you’ll believe anything.”

Even taking at face value the Chancellor’s forecasts, the UK will have to borrow some £175bn this year and £173bn the next to make up for the shortfall in tax revenues and extra demands on the public purse from increased social welfare spending.

At over 12pc of gross domestic product, these represent the worst years for the public finances since the 1940s. However, the optimistic economic forecasts are doubly significant in this case because higher growth means a lower deficit. Should the Chancellor’s economic projections be proven wrong, the eventual outcome for the national accounts will be worse still, according to City analysts, with total borrowing likely to surpass £200bn and not to peak until next year.

“This leaves the already horrendous borrowing projections looking too optimistic,” said Ross Walker, an economist at Royal Bank of Scotland. Michael Saunders, chief UK econmist at Citigroup, said: “I shake my head in despair. As the Chancellor faces a terrible fiscal position no one outside the Treasury will believe the forecasts. When I saw the public spending plans I nearly fell off my chair,” he added.

The tidal wave of extra debt will push up Britain’s net national debt from below 40pc – one of the ceilings set by Gordon Brown in 1998 but since abandoned – to almost 80pc.

The Treasury said it still had no plans to reinstate any fiscal rules to bring its borrowing back under control in the future. In fact, it said it did not expect the budget to come back into balance until 2018 or beyond.

The Budget came amid continuing bad economic news, with the Office for National Statistics announcing that unemployment jumped by 177,000 to 2.1m in the three months to February, taking the jobless rate to 6.7pc.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

UK unemployment hits 2.1m ahead of Budget for jobs

UK jobless numbers swell to the highest since Labour came to power in 1997 as 73,700 more people joined the dole queue.

The number of people out of work rose by 177,000 to 2.1 million in the three months to February, official figures showed today, as Alistair Darling prepared to outline his “Budget for jobs.”

New jobs data from the Office National Statistics (ONS) was better than expected with the number claiming benefits rising by 73,700 to 1.46 million in March. The figure is a major improvement on February when the number of people claiming jobseekers’ allowance rose by a record 138,400 to 1.4 million.

The figures were unveiled as Mr Darling prepared to unveil a Budget that will include a £2.5 billion package to guarantee work or training for every young person out of work for more than a year.

Thousands more Civil Service jobs will be lost over the next four years as departments struggle to find £45 billion in “efficiency savings” by 2013-14.

Alistair Darling will claim to be introducing a “Budget for jobs” today with a £2.5 billion package that includes a guarantee of work or training for every young person out of work for more than a year. The Chancellor will also back recommendations by five external advisers to find savings by cutting office space, selling property, privatising assets and sharing purchasing contracts across the Government.

The advisers recommend savings starting at £5 billion a year and rising to £15 billion annually by 2013-14. Suggestions include cutting office space by 30 per cent, through hot-desking, halving the size of the Land Registry and preparing the Royal Mint for whole or partial sale.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Tens of thousands of home owners evicted since labour spin of help

Tens of thousands of home owners have been evicted from their homes since Gordon ditherer Brown first span a package of measures to help them.

Calculations suggest up to 28,000 households -across Britain have had their homes repossessed despite the measures being announced last December.

The Homeowner Mortgage Support Scheme, intended to help home owners by allowing them to delay their mortgage payments, was announced by the Prime Minister with great fanfare at the end of last year as a way of helping struggling families across Britain remain in their homes as the recession took hold.

However, almost five months has passed, and the delay in launching the scheme has meant it is too late for tens of thousand of borrowers who were unable to keep up with their mortgage repayments.

The figures have prompted mortgage experts and politicians to describe the delay in launching the scheme as “outrageous”.

They accused the labour Government of trying to “spin a headline” rather than provide genuine help amid the housing slump.

Grant Shapps, the shadow housing minister, said: “The Prime Minister just doesn’t seem to appreciate the urgency of the situation in the housing market. People are suffering now, and looking for urgent help.

“The trouble is that home owners believed the hype – and as a constituency MP I’m often approached by people who say they thought there was a scheme out there to help them.

The figures calculated by the Conservatives are based on data from the Council of Mortgage Lenders, which forecasts that 75,000 will be repossessed this year.

But it has come too late for many home owners who have lost their homes during the past five months.

Melanie Bien, of mortgage brokers Savills Private Finance, said: “While the scheme has admirable intentions in trying to save home owners from repossession, it is outrageous that it has taken so long for it to be implemented.

“There has been precious little detail on this scheme from the start and desperate homeowners have been waiting for some clarification: this will come too late for many.”

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

US economy facing substantial recessionary risks

The US economy is facing “substantial risks” as the property bust spreads to commercial real estate and the recession engulfs the world, a top White House adviser has said.

Larry Summers, chair of the National Economic Council, said there were signs that worst may be over but warned that “it is a long road and it is going to take time” after the damage inflicted on the financial system.

“There are downside contingencies that we’ve got to prepare for, issues in the global economy, in commercial real estate. We can’t know with certainty what’s going to happen next, and there certainly are real risks ahead,” he said at the Americas summit in Trinidad.

US house building appears to be stabilising near 500,000 a month, albeit a very low level. The number of new jobless claims has dropped over the last two weeks.

Dominic Wilson, a strategist at Goldman Sachs, said: “There are few clearer signals than this that the market remains highly uncertain about the recovery path and the risks ahead”

Mr Wilson said one year VIX contracts have remained at elevated levels not seen since the Great Depression.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Almost one million UK home owners in negative equity, says CML

Almost one million UK home owners are in negative equity, the Council of Mortgage Lenders has suggested.

It claimed that about 900,000 home owners currently have some degree of negative equity, where the value of their home is less than their mortgage.

Bob Pannell, head of research at the CML, said negative equity had “resurfaced” as house prices have fallen and that it “will contribute to subdued property turnover”.

However, the CML said the majority of those in negative equity around two thirds face only modest shortfalls of less than 10 per cent, equating to around £6,000 for those first-time buyers with negative equity, and £8,000 for other home-buyers.

The CML’s estimate is less than some economists’ predictions that nearly four million home owners are already suffering from the predicament. And it is still less than the 1.5 million households estimated to have negative equity at the depth of the last housing market slump in 1993.

It said: “Falling house prices have once again raised the prospect of negative equity for borrowers. Although negative equity may reduce a household’s coping strategies should they encounter payment difficulties, it does not of itself affect the ability to keep up mortgage payments or create a risk of repossession.”

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.