Not too long ago, some analysts were still claiming that turmoil in the financial markets would have scant impact on the real economy. But the “after-shock” of credit market ructions, as Stephen Roach of Morgan Stanley put it, is now clearly kicking in.
Moreover, the credit squeeze showed no sign of easing this week, with banks’ continued reluctance to lend to each other propelling the gap between the UK three-month interbank rate and the base rate to the highest level since the crisis began. Banks have been urging the Bank of England to widen the range of collateral it will accept in an effort to unblock the money markets.
The crunch continues
Against this backdrop, it’s no wonder the Halifax ignored Gordon Brown’s call for lower mortgage rates. It upped the rate on its two-year tracker to 1.99% above the base rate from 1.49%, highlighting “the impotence of the Bank’s interest rate cuts”, as Nigel Morris said in The Independent.
Meanwhile, around 600,000 people, double last year’s figure, could face bankruptcy or taking out an IVA, a debt restructuring programme, this year, said TDX Group. Thanks to the crunch, remortgaging or taking out new loans to pay off existing ones will be much harder in 2008.
Housing and retail suffer
The impact on the wider economy, meanwhile, became clearer. The housing market slide gathered momentum, with the latest RICS survey revealing that 79% more surveyors reported falling rather than rising house prices – the worst figure since the survey’s inception in 1978. With the stock of unsold property at a decade high and ever-tighter lending criteria crimping the purchasing power of the dwindling number of active buyers, “further house price falls seem inevitable”, said Capital Economics.
Given the close historical correlation between UK house prices and consumer spending, that means “UK retailers are in for a dead quiet summer”, said Ian Campbell on Breakingviews.com. March saw the first year-on-year drop in retail sales for two years. Consumer caution has kept a lid on inflation as firms have absorbed sharp increases in producer prices to attract buyers; the consumer price index remained static at 2.5% last month, although higher energy prices are set to boost the rate in the near future. The margin squeeze will worsen as falling house prices crimp spending, said David Kern of the British Chamber of Commerce.
Finally, unemployment, always a lagging indicator of trouble, is unlikely to lag much longer. JP Morgan has just doubled its estimate of City job losses owing to the crunch to 40,000, or around 5% of staff. That’s “12 empty Gherkins”, said The Times. Given all the trouble ahead, the damage to the real economy, as Hugo Dixon said on Breakingviews.com, “has barely started”.