Some of the main article first below is pretty basic stuff but it is
a reasonable guide to the best way to react in the various likely
circumstances . Hope it's of use!
The a brief overview of the economic world today.
xxxxxxxxx cs
========================
TIMES 30.12.08
The party's over if deflation grips the economy
We explain why falling prices could wreak havoc with your finances
Andrew Ellson and Anne Ashworth
Inflation is tumbling and fears are growing that deflation, where
prices actually start falling, may become a feature of the economy
next year.
This week the Office for National Statistics reported that the
consumer prices index (CPI), a key measure of inflation, fell to 4.1
per cent last month, down from a high of 5.2 per cent in September.
Jonathan Loynes, chief European economist at Capital Economics, the
consultancy, says: "November's CPI figures are another step along the
path that is likely to lead to the first bout of deflation in the UK
for almost half a century."
While falling prices may sound great, deflation is actually
considered bad for the economy. When prices fall, consumers defer
purchases on the assumption that they will be able to buy the same
goods cheaper at a later date. This damages demand which can
undermine company profits, trigger unemployment and entrench a
destructive economic cycle.
Here we explain what falling prices might also mean for your savings,
investments, pension, house price and mortgage - and how to guard
against the worst effects.
Savings
To some extent, deflation is good news for savers because it
increases the size of deposits relative to prices, making them more
valuable in real terms. However, the downside is that the rates on
savings accounts are likely to tumble if deflation takes hold because
the Bank of England would reduce the base rate to 0 per cent or close
to it. Savings rates are already falling fast. At the start of
October, when the base rate was at 5 per cent, you could lock in to
accounts paying an impressive 7 per cent. But now, with the base rate
at 2 per cent, the most you can earn is about 5.5 per cent.
Returns in Japan, which suffered a decade of deflation, are close to
non-existant. Simon Somerville, of Jupiter Asset Management, says:
"The most you can earn from a Japanese bank account is about 0.4 per
cent, but most pay nothing in interest. It is no wonder that many
Japanese savers have abandoned banks and put their cash in safes or
under the mattress."
Savers in the UK may not end up quite so badly off, but only because
our banks desperately need to bolster their finances. Some may
continue to offer decent rates, as it is one of the easiest ways for
them to raise money. So the pitiful state of the UK's banking system
could yet offer a silver lining for savers.
Kevin Mountford, of the comparison website moneysupermarket.com, says
that the best way for savers to guard against falling returns is to
lock in to a long-term fixed-rate account. He says: "The best one-
year fixed rate is from Anglo Irish Bank, at 5 per cent, but be quick
as such rates could disappear soon. It is probably safe to lock up
savings for up to two years, but any longer and there is a risk that
the base rate - and savings rates - will start moving higher again.
Nationwide is offering a two-year Isa bond paying 4 per cent."
Pensions
Deflation could wreak havoc with retirement plans, especially if the
problem persists for years. As prices fall, so will corporate profits
and stock market investments. Given that many individuals and
companies rely on shares to fund pension growth, many savers will
have their retirement plans cast into doubt. Tumbling share prices
have already wiped nearly a quarter off the average personal pension
fund in the past year.
Even investors in final-salary plans, which guarantee a pension based
on income, could hit the skids. As companies struggle to finance
their pensions, the remaining final-salary schemes could close en
masse. Even the Government, which backs the biggest final-salary
scheme of all for public sector workers, may be forced to take
drastic action, perhaps closing it to new entrants.
Tom McPhail, of Hargreaves Lansdown, the independent financial
adviser, says that anyone approaching retirement should consider
locking into an annuity sooner rather than later. He says: "As long
as your pension fund has not been decimated by the recent stock
market turmoil now might be a good time to buy a retirement income
because annuity rates could well fall over the coming year or so. If
you can afford to do so, deferring your state pension could also
help. Provided that you are prepared to take the longevity and
political risk - by which I mean that you don't think that you will
die any time soon and you trust the Government to meet its promises -
then you can boost retirement income by 10.4 per cent for every year
you defer taking your pension."
Those who are already retired could be among the few winners.
Benefits, including the state pension, are linked to the retail
prices index and can't be cut if inflation goes negative. The worst
that can happen is that benefits remain unchanged. Many pensioners
have fixed incomes, so inflation erodes their spending power. If
prices drop, they will be able to buy more with their pensions.
House prices and mortgages
Homeowners are already experiencing deflation, with the average house
price having fallen by almost 15 per cent over the past year,
according to the Halifax.
Deflation in the wider economy would be a further blow because
mortgage debt would increase in real terms, by becoming more
expensive relative to prices. Fionnuala Earley, Nationwide's chief
economist, explains: "Inflation tends to be good for borrowers, as it
shrinks the real size of debt. In inflationary periods, wages also
tend to rise, making it easier to meet mortgage payments. If there
were deflation, debt would hang around longer and even grow in real
terms, as wages would not be increasing and prices in the shops would
be falling."
Sadly, there is little that borrowers can do to mitigate the effects
of deflation. Melanie Bien, of Savills Private Finance, the mortgage
broker, says: "The first step is to keep up with your repayments. The
mortgage should be your priority; everything else should be paid
after that. You can also help by reducing your mortgage by
overpaying. If you are lucky enough to have a tracker mortgage, you
could overpay by the amount you are saving from lower interest rates."
Most lenders will let you overpay by up to 10 per cent of your
mortgage each year without penalty.
Ms Bien adds: "If you have an interest-only deal, it is worth
considering switching to a repayment mortgage to ensure that the
capital is paid off by the end of the mortgage term. This will mean
significantly higher monthly payments, but it will be worth it in the
long run. Speak to your lender about switching - it is very
straightforward and can usually be arranged over the phone."
Recent housing market history gives no indication whether residential
property would be viewed as an attractive investment during a
sustained period of deflation. Mortgages would continue to be
available but the miserable experience of overextended borrowers
could result in widespread aversion to debt, particularly among
members of the younger generation.
At the same time, the lack of any meaningful returns from savings
might persuade some people with spare cash to put it into property
because bricks and mortar would be a tangible asset in an unfamiliar
and insecure environment.
Additional reporting by David Budworth
Japan still licking its wounds
The most recent guide to what deflation might mean for UK investors
is to look at what happened in Japan in the 1990s, writes Mark Atherton.
When Japan's property and stock market bubble burst with a vengeance
in the early 1990s, the country experienced a prolonged period of
deflation.
With consumers reluctant to spend because of falling prices, the
economy stagnated, company profits fell and the stock market tumbled.
The Nikkei index stood at nearly 39,000 at the start of the 1990s but
now stands at a lowly 8,500, even though deflation has been
eradicated for the time being.
John Hatherly, of Seven Investment Management, says: "What happened
was that everyone started to draw in their horns and conserve their
cash, rather than put it into assets that were falling in value.
Investors deserted shares and property for safer havens."
One of these safe havens was government bonds. Mick Gilligan, of
Killik & Co, the stockbroker, says: "Investors reckoned, correctly,
that the Japanese Government would not go bust and that government
bonds were a safe bet, even though the interest they paid was small."
Corporate bonds, on the other hand, tend not to fare so well in
deflationary times because, with profits falling, there is less money
to cover the bond interest payments and there is always the
possibility of defaults on the payments or a collapse in the value of
the bond itself if the company goes bust
========================
Short Reports & Headlines
TIMES 30.12.08
Sterling bounces off Monday's record low
Sterling today bounced modestly off Monday's record low of 97.99p
against the euro to trade at 97.65p but fell to a six-year low
against the dollar.
At ?102.4 (=?1 =97.7p) the pound has, however, failed to claw back
much of the 2 cent loss of yesterday. Currency markets continue to
assume that sterling will soon reach parity against the euro on the
view that the bleak outlook for the British economy will mean more
aggressive rate cuts than in the eurozone.
At one stage today, sterling also hit a low of $1.4385 against the US
currency, its weakest level since April 2002, but rallied later to
$1.4484. Trade-weighted sterling fell to 73.6, the lowest level on
daily records held by the Bank of England, which go back to 1990.
The dollar's decline against other currencies came as the Israeli
attacks on Hamas in Gaza raised concerns about oil supplies in the
Middle East and spurred buying of safe-haven assets, including the
Swiss franc.
(- - - - - - - - - - -)
=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=
FINANCIAL TIMES
US vehicle sales at 25-year low
Nikkei closes last session of worst-ever year
Japanese stock average down a record 42.1% on the year
US home prices fall at record rate of 18%
Consumer confidence falls to all-time low
Eurozone lending stagnates as banks tighten terms
Data fuel expectations of January rate cut
Posts
