Chancellors often see their first budget speech as a chance to show off. But Alistair Darling “has nothing, as it were, to show”, says Philip Stephens in the FT.
For starters, the credit crunch refuses to go away. It seems banks have become more reluctant to lend to each other of late amid ongoing credit market turmoil; the three-month LIBOR interbank rate has risen despite February’s rate cut, and is now at a two-month high.
Meanwhile, banks are tightening their lending standards for companies, which are also finding it more expensive to raise funds in the capital markets as corporate bond yields have crept up, notes Capital Economics.
The economy is slowing…
Bank of England governor Mervyn King’s warning that living standards are coming under pressure was borne out this week by a study from the Centre for Economics and Business Research, which showed that the average household suffered a 3.2% fall in its disposable income last year as higher prices, bills and taxes outstripped earnings growth. This helps explain why consumer confidence has slid for a sixth month in a row to a 13-year low, while news from the housing market is also depressing sentiment.
Nationwide has reported that prices fell for the fourth successive month, with the average house price falling £6,500 since October. Mortgage approvals are 40% down on a year ago, and demand is hardly likely to improve given that risk-averse lenders are clamping down on credit and looking to fatten their margins, which means that interest rate cuts are unlikely to be fully passed on, said Capital Economics. Annual house price growth of 2.7% is “fast approaching negative territory”. A KPMG survey this week showing the first drop in permanent staff appointments in five years is another ill wind.
…but inflation isn’t
Amid all these harbingers of a slowdown, however, inflationary pressure keeps mounting. The price of goods leaving factories posted its sharpest jump in February since records began nine years ago, according to the CIPS purchasing managers’ index, and the BDO Inflation index, which collates price expectations among businesses, has hit a record high, with many firms saying they intend to pass higher costs on. Meanwhile, the expected 21% jump in Chinese minimum wages this year is an “unwelcome reminder” that China’s deflationary impact on global prices is ending, says Breakingviews’ Martin Hutchinson.
Given all this, along with the gaping budget deficit, next week’s Budget is likely to be “the most sombre since Labour took power”, as Hamish McRae puts it in The Independent.