The Telegraph carries a comprehensive assessment of the economic
prospects including a look at the troubled American scene which has
so many international repercussions.
xxxxxxxxxx cs
===================
TELEGRAPH 17.12.08
1. Sterling fall is a life-saver for UK economy
The sharp slide in the pound has been a godsend for the UK economy
and may have helped Britain avert a much more serious crisis,
according to the German bank Dresdner Kleinwort.
By Ambrose Evans-Pritchard
"If the currency had not gone down so far, think how much worse it
could have been. A weaker sterling is just what you need in the
current situation," said David Owen, the bank's chief economist for
developed markets .
He said exporters taking advantage of the 20pc fall in sterling to
boost profit margins, giving them a vital cushion to help survive the
collapse in lending. This is the same pattern seen after the ejection
of the pound from Europe's Exchange Rate Mechanism in 1992.
"Export margins are going through the roof, and this helps not just
manufactuiring but also service exports. Profits are holding up
surprisingly well. With banks threatening to cut off credit lines,
these companies need all the help they can get," he said.
"We have been in a train-wreck since August 2007 and it is going on
and on. Credit insurance is drying up. We are hearing anecdotal
evidence that banks are telling custormers not to rely on them for
finance next year. If credit lines are cut off, even good companies
will go into receivership," he said.
The concern is that there may be two more shoes to drop in this
crisis. The wave of corporate defaults has hardly begun, and
inventories are still too high for this stage of the cycle.
"The good thing is that the authorities have thrown an awful lot of
ammo at this problem. We're effectively moving towards zero interest
rates in all the major economies. But we know from Japan that the
central banks can pump liquidity into the system but that doesn't
guarantee recovery if the banks won't lend," he said.
The risk is that foreign investors stop buying Gilts and other forms
of British debt, setting off a pound exodus that could spin out of
control - as happened to Iceland's krona. UK bond auctions have held
up well so far.
Mr Owen said newspaper columnists fretting about a sterling crisis
should remember what happened early 1930s when Britain was the first
major economy to leave the Gold Standard and reflate through
devaluation (and rate cuts). While the episode was humiliating at the
time, it was a key reason why the UK economy contracted by just 5pc
during the Great Depresssion compared to 15pc for France and 30pc for
the US.
Stephen Jen, currency chief at Morgan Stanley, said sterling is a
"high-beta" currency, meaning that it is highly-geared to the global
economic cycle. It shoots up during good times and plunges during bad
times. It should return to health if and when the world emerges from
economic winter..
The Bank of England's view is that sterling has served its purpose
well in this crisis, acting as a shock-absorber
=-=-=-=-=-=-=-=
prospects including a look at the troubled American scene which has
so many international repercussions.
xxxxxxxxxx cs
===================
TELEGRAPH 17.12.08
1. Sterling fall is a life-saver for UK economy
The sharp slide in the pound has been a godsend for the UK economy
and may have helped Britain avert a much more serious crisis,
according to the German bank Dresdner Kleinwort.
By Ambrose Evans-Pritchard
"If the currency had not gone down so far, think how much worse it
could have been. A weaker sterling is just what you need in the
current situation," said David Owen, the bank's chief economist for
developed markets .
He said exporters taking advantage of the 20pc fall in sterling to
boost profit margins, giving them a vital cushion to help survive the
collapse in lending. This is the same pattern seen after the ejection
of the pound from Europe's Exchange Rate Mechanism in 1992.
"Export margins are going through the roof, and this helps not just
manufactuiring but also service exports. Profits are holding up
surprisingly well. With banks threatening to cut off credit lines,
these companies need all the help they can get," he said.
"We have been in a train-wreck since August 2007 and it is going on
and on. Credit insurance is drying up. We are hearing anecdotal
evidence that banks are telling custormers not to rely on them for
finance next year. If credit lines are cut off, even good companies
will go into receivership," he said.
The concern is that there may be two more shoes to drop in this
crisis. The wave of corporate defaults has hardly begun, and
inventories are still too high for this stage of the cycle.
"The good thing is that the authorities have thrown an awful lot of
ammo at this problem. We're effectively moving towards zero interest
rates in all the major economies. But we know from Japan that the
central banks can pump liquidity into the system but that doesn't
guarantee recovery if the banks won't lend," he said.
The risk is that foreign investors stop buying Gilts and other forms
of British debt, setting off a pound exodus that could spin out of
control - as happened to Iceland's krona. UK bond auctions have held
up well so far.
Mr Owen said newspaper columnists fretting about a sterling crisis
should remember what happened early 1930s when Britain was the first
major economy to leave the Gold Standard and reflate through
devaluation (and rate cuts). While the episode was humiliating at the
time, it was a key reason why the UK economy contracted by just 5pc
during the Great Depresssion compared to 15pc for France and 30pc for
the US.
Stephen Jen, currency chief at Morgan Stanley, said sterling is a
"high-beta" currency, meaning that it is highly-geared to the global
economic cycle. It shoots up during good times and plunges during bad
times. It should return to health if and when the world emerges from
economic winter..
The Bank of England's view is that sterling has served its purpose
well in this crisis, acting as a shock-absorber
=-=-=-=-=-=-=-=
2. Mr Bernanke correctly judged the risk of deflation
US consumer prices are dropping at the fastest rate since January
1932 on a strict dollar for dollar basis. New house building fell by
18.9pc in November to 625,000, the lowest since records began half a
century ago. It is not yet clear whether America is sliding into a
deflation trap but the risk is grave enough to justify radical
measures as insurance against a potentially disastrous chain of events.
By Ambrose Evans-Pritchard [nb In the paper version this is in City
Comment’ edited by Richard Fletcher, with the first sentence* in
addition]
*In the US it is even grimmer The sort of deflation now spreading
across North America, Japan, and parts of Europe is not the benign
variety of the late 19th century when prices slid gently for year
after year. Debt levels are much higher today, so the deflation
effect is that much more dangerous.
The danger is a self-feeding downward spiral as the `real’ burden of
debt keeps rising into the slump, as Irving Fisher dissected in his
great opus “The Debt-Deflation Theory of Great Depressions”.
US inflation was minus 1.7pc in November, and minus 1pc in October.
This entirely vindicates the brave decision by Ben Bernanke at the US
Federal Reserve -- and our our own Mervyn King at the Bank of England
-- to “look through” the oil spike earlier this year and keep his
focus on the underlying forces at work in the global economy.
While Mr Bernanke may have been caught flat-footed by the onset of
the credit crisis in the summer of 2007, he has since moved with
impressive speed.
The string of emergency rate cuts this year have now brought America
to the brink of zero. They may prevent the current credit crash from
metastasizing into a full-blown depression. We do not yet know for
sure. It takes a year or so for the effects of monetary policy to
feed through the economy even when the banking system is functioning.
It will take even longer this time. But matters would undoubtedly be
worse if the Fed’s backwoodsmen had succeeded in imposing a
liquidation squeeze on the US economy, as they did from 1930 to 1932.
Mr Bernanke has not run out of ammunition yet. He has a nuclear
arsenal, and has begun to use it. The Fed is already buying mortgage
debt. It has infinite means of injecting stimulus into the economy by
`quantitiative easing’, if needs be. It can ultimately print money
and hang it on Christmas trees.
Mr Bernanke correctly judged the risk of deflation. His critics did
not anticipate this price collapse. The burden in now on them to
explain why they are sure that deflation can safely be left to run
its malign course.
=-=-=-=-=-=-=-=
US consumer prices are dropping at the fastest rate since January
1932 on a strict dollar for dollar basis. New house building fell by
18.9pc in November to 625,000, the lowest since records began half a
century ago. It is not yet clear whether America is sliding into a
deflation trap but the risk is grave enough to justify radical
measures as insurance against a potentially disastrous chain of events.
By Ambrose Evans-Pritchard [nb In the paper version this is in City
Comment’ edited by Richard Fletcher, with the first sentence* in
addition]
*In the US it is even grimmer The sort of deflation now spreading
across North America, Japan, and parts of Europe is not the benign
variety of the late 19th century when prices slid gently for year
after year. Debt levels are much higher today, so the deflation
effect is that much more dangerous.
The danger is a self-feeding downward spiral as the `real’ burden of
debt keeps rising into the slump, as Irving Fisher dissected in his
great opus “The Debt-Deflation Theory of Great Depressions”.
US inflation was minus 1.7pc in November, and minus 1pc in October.
This entirely vindicates the brave decision by Ben Bernanke at the US
Federal Reserve -- and our our own Mervyn King at the Bank of England
-- to “look through” the oil spike earlier this year and keep his
focus on the underlying forces at work in the global economy.
While Mr Bernanke may have been caught flat-footed by the onset of
the credit crisis in the summer of 2007, he has since moved with
impressive speed.
The string of emergency rate cuts this year have now brought America
to the brink of zero. They may prevent the current credit crash from
metastasizing into a full-blown depression. We do not yet know for
sure. It takes a year or so for the effects of monetary policy to
feed through the economy even when the banking system is functioning.
It will take even longer this time. But matters would undoubtedly be
worse if the Fed’s backwoodsmen had succeeded in imposing a
liquidation squeeze on the US economy, as they did from 1930 to 1932.
Mr Bernanke has not run out of ammunition yet. He has a nuclear
arsenal, and has begun to use it. The Fed is already buying mortgage
debt. It has infinite means of injecting stimulus into the economy by
`quantitiative easing’, if needs be. It can ultimately print money
and hang it on Christmas trees.
Mr Bernanke correctly judged the risk of deflation. His critics did
not anticipate this price collapse. The burden in now on them to
explain why they are sure that deflation can safely be left to run
its malign course.
=-=-=-=-=-=-=-=
3. Taxpayers face new pain as Gordon Brown's bank bail-out fails to
stop credit crunch
Taxpayers face paying billions of pounds more to prop up Britain's
banks because Gordon Brown's bail-out has failed to stop the credit
crunch, the Bank of England Governor has warned.
By Edmund Conway, Economics Editor
In comments which raise the ultimate prospect of wholesale
nationalisation of the British banking system, Mervyn King said that
"additional measures" are now needed to solve the crisis.
The £500bn rescue plan unveiled by the Prime Minister in October and
since copied throughout the world is not encouraging banks to lend
more to families and businesses, he said.
It is the most stark warning yet from the Governor that all his and
Whitehall's efforts to bring the crisis to an end have not succeeded.
Banks now need extra support from the taxpayer if they are to return
to normal lending, he indicated. Facing the worst financial crisis in
living memory, UK banks have slashed the amount they lend out to
homeowners, resulting in higher interest rates and tougher conditions
for homeowners.
The Bank's efforts to combat this by cutting interest rates by 3
percentage points in only eight weeks have not succeeded.
Although three banks - Royal Bank of Scotland, HBOS and Lloyds TSB -
have been part-nationalised, Mr King's comments indicate that more
may now need to be done: including bringing the banks into full
public ownership.
In a letter sent to the Chancellor, Alistair Darling, Mr King said
the UK is trapped in a vicious circle, as the financial turmoil is
"exacerbated by the further tightening in the supply of credit to
households and businesses... Additional measures, building on the
Government's package to support the banking system announced in
October, will probably be required to underpin lending to households
and companies."
Mr King's warning will revive fears for the survival of the banking
system, which had lain dormant since the events of October.
Asked recently about whether to rule out the wholesale
nationalisation of the banking system, Mr King said it would be "a
very serious error to rule out measures which may eventually prove
necessary".
Although senior policymakers view such an eventuality as a last
resort, it has come significantly closer. The bank bail-out has not
had the desired effect in kick-starting lending, although it has, so
far, prevented the banks from collapsing entirely.
Peter Spencer of the University of York warned that full-scale
nationalisation is now "almost inevitable".
He said: "There are a number of other measures you can try first -
further interest rate cuts, and various tweaks to Alistair Darling's
[bail-out] plan. However, the real problem here is we still don't
know the scale of what we're dealing with. We need regulators to go
into the banks and have a really good look round [at the scale of the
so-called toxic debt on their balance sheets].
"I suspect they will discover that another £50 billion or so of
capital is needed. If that happens then the banks will effectively be
nationalised. The whole thing is very scary, but I think it's almost
inevitable.
"However, there is a difference between grabbing and hospitalising
the banks. This would be a temporary measure for a few years."
Mr King's warning that the bail-out is not working is a blow for the
Prime Minister, whose reputation has been boosted both at home and
overseas after his bail-out scheme was adopted by a range of
different countries around the world.
He was forced to step in to rescue British banks after the collapse
of investment bank Lehman Brothers triggered what Mr King has
described as the worst UK financial crisis since the start of World
War One.
With HBOS and RBS close to collapse, the Government had to spend £50
billion pumping cash directly into them by buying up shares.
It spent a further £250 billion on a credit guarantee scheme to help
fund banks, and extended the size of the Special Liquidity Scheme -
designed to ensure banks are not brought down by US mortgage debt -
to £200bn. At a total of £500 billion, the money at risk equates to
£15,770 for every UK taxpayer.
It also raises the worrying prospect that the Government will have to
borrow even more in the coming years to keep the economy afloat. The
Treasury is already heading next year for its worst budget deficit
since the Second World War, sparking fears about Britain's credit-
worthiness.
The pound has slumped sharply against both the dollar and the euro in
recent months, sparking fears that sterling could soon hit parity -
with a pound being valued at the same level as one euro.
Experts have warned that the pound's slide is a signal that foreign
investors may be abandoning the UK, fearing that it is facing a worse
recession than its fellow Western nations. [This has been utterly
obvious from the start so why the surprise ? -cs]
Mr King warned in his letter that Consumer Price Index inflation,
yesterday confirmed at 4.1 per cent, would drop sharply in the coming
months as the effect of the VAT cut and the broader recession make
themselves felt.
According to the Treasury's own forecasts, the UK will experience
deflation next year, with prices falling across the economy as
consumers cut back on their spending. [This is happening already in
America - see ‘2.’ above -cs]
Mr Darling this week announced that he was cutting the cost of
guaranteeing banks' debt, and is expected in the coming days to
unveil a scheme to guarantee lending to companies. Although these
schemes are likely to ease some of the financial stress, analysts
have warned that they may not go far enough.
According to Arturo De Frias, banking analyst at bank Dresdner
Kleinwort: "Governments need the banks to keep on lending in order to
avoid a vicious circle and prevent recessions from becoming
depressions. Governments also want banks to keep lending margins low
in order to avoid triggering even more bankruptcies. But banks cannot
lend cheaply in a recession and recapitalise simultaneously."
=-=-=-=-=-=-=-=-
stop credit crunch
Taxpayers face paying billions of pounds more to prop up Britain's
banks because Gordon Brown's bail-out has failed to stop the credit
crunch, the Bank of England Governor has warned.
By Edmund Conway, Economics Editor
In comments which raise the ultimate prospect of wholesale
nationalisation of the British banking system, Mervyn King said that
"additional measures" are now needed to solve the crisis.
The £500bn rescue plan unveiled by the Prime Minister in October and
since copied throughout the world is not encouraging banks to lend
more to families and businesses, he said.
It is the most stark warning yet from the Governor that all his and
Whitehall's efforts to bring the crisis to an end have not succeeded.
Banks now need extra support from the taxpayer if they are to return
to normal lending, he indicated. Facing the worst financial crisis in
living memory, UK banks have slashed the amount they lend out to
homeowners, resulting in higher interest rates and tougher conditions
for homeowners.
The Bank's efforts to combat this by cutting interest rates by 3
percentage points in only eight weeks have not succeeded.
Although three banks - Royal Bank of Scotland, HBOS and Lloyds TSB -
have been part-nationalised, Mr King's comments indicate that more
may now need to be done: including bringing the banks into full
public ownership.
In a letter sent to the Chancellor, Alistair Darling, Mr King said
the UK is trapped in a vicious circle, as the financial turmoil is
"exacerbated by the further tightening in the supply of credit to
households and businesses... Additional measures, building on the
Government's package to support the banking system announced in
October, will probably be required to underpin lending to households
and companies."
Mr King's warning will revive fears for the survival of the banking
system, which had lain dormant since the events of October.
Asked recently about whether to rule out the wholesale
nationalisation of the banking system, Mr King said it would be "a
very serious error to rule out measures which may eventually prove
necessary".
Although senior policymakers view such an eventuality as a last
resort, it has come significantly closer. The bank bail-out has not
had the desired effect in kick-starting lending, although it has, so
far, prevented the banks from collapsing entirely.
Peter Spencer of the University of York warned that full-scale
nationalisation is now "almost inevitable".
He said: "There are a number of other measures you can try first -
further interest rate cuts, and various tweaks to Alistair Darling's
[bail-out] plan. However, the real problem here is we still don't
know the scale of what we're dealing with. We need regulators to go
into the banks and have a really good look round [at the scale of the
so-called toxic debt on their balance sheets].
"I suspect they will discover that another £50 billion or so of
capital is needed. If that happens then the banks will effectively be
nationalised. The whole thing is very scary, but I think it's almost
inevitable.
"However, there is a difference between grabbing and hospitalising
the banks. This would be a temporary measure for a few years."
Mr King's warning that the bail-out is not working is a blow for the
Prime Minister, whose reputation has been boosted both at home and
overseas after his bail-out scheme was adopted by a range of
different countries around the world.
He was forced to step in to rescue British banks after the collapse
of investment bank Lehman Brothers triggered what Mr King has
described as the worst UK financial crisis since the start of World
War One.
With HBOS and RBS close to collapse, the Government had to spend £50
billion pumping cash directly into them by buying up shares.
It spent a further £250 billion on a credit guarantee scheme to help
fund banks, and extended the size of the Special Liquidity Scheme -
designed to ensure banks are not brought down by US mortgage debt -
to £200bn. At a total of £500 billion, the money at risk equates to
£15,770 for every UK taxpayer.
It also raises the worrying prospect that the Government will have to
borrow even more in the coming years to keep the economy afloat. The
Treasury is already heading next year for its worst budget deficit
since the Second World War, sparking fears about Britain's credit-
worthiness.
The pound has slumped sharply against both the dollar and the euro in
recent months, sparking fears that sterling could soon hit parity -
with a pound being valued at the same level as one euro.
Experts have warned that the pound's slide is a signal that foreign
investors may be abandoning the UK, fearing that it is facing a worse
recession than its fellow Western nations. [This has been utterly
obvious from the start so why the surprise ? -cs]
Mr King warned in his letter that Consumer Price Index inflation,
yesterday confirmed at 4.1 per cent, would drop sharply in the coming
months as the effect of the VAT cut and the broader recession make
themselves felt.
According to the Treasury's own forecasts, the UK will experience
deflation next year, with prices falling across the economy as
consumers cut back on their spending. [This is happening already in
America - see ‘2.’ above -cs]
Mr Darling this week announced that he was cutting the cost of
guaranteeing banks' debt, and is expected in the coming days to
unveil a scheme to guarantee lending to companies. Although these
schemes are likely to ease some of the financial stress, analysts
have warned that they may not go far enough.
According to Arturo De Frias, banking analyst at bank Dresdner
Kleinwort: "Governments need the banks to keep on lending in order to
avoid a vicious circle and prevent recessions from becoming
depressions. Governments also want banks to keep lending margins low
in order to avoid triggering even more bankruptcies. But banks cannot
lend cheaply in a recession and recapitalise simultaneously."
=-=-=-=-=-=-=-=-
4. Lord Harris says no end to slump in sight.
Carpetright makes first dividend cut as profits slide
Lord Harris of Peckham, the founder of Carpetright, has warned there
is no end in sight to the economic downturn and slashed his company's
dividend as the chain reported a 67pc fall in profits.
By James Hall, Retail Editor
Carpetright said that underlying pre-tax profit over the 26 weeks to
November 1 fell from £27.2m to £8.8m. Like-for-like sales in the UK
fell by 13pc. Total sales fell to £236.8m from £251m last year.
The company cut its dividend from 22p to 4p, payable on February 20.
It is the first time that Lord Harris has cut a dividend. [More
companies will follow suit -cs]
Lord Harris said: "I expected my 51st year of selling carpets to be
extremely challenging, and it has proved to be the case."
He also warned that he can see no end to the current downturn. "I
wouldn't know when we're coming out. There are three problems on
people's minds – they are worried about the banking system, about
housing and about unemployment.
"Until two of those three things are stable, things won't improve,"
he said.
Lord Harris said Carpetright is gaining market share as other chains
fail. It now commands about 30pc of the UK carpet market.
The chain has had to increase its prices due to the fluctuating
commodity market. Usually, changes in oil, currency and yarn prices
mean that Carpetright makes 500 price changes every six months.
However, over the past six months it has had to make 10,000 price
changes, Lord Harris said
Posts
