Grim news piled up thick and fast this week. A study by Capital Economics estimated that up to 440,000 workers could be made redundant in the next two years, with the unemployment rate rising from 5.3% to 8%.
The property market is “hurtling into a crash”, as Julia Finch put it in The Guardian. Mortgage approvals for new house purchases fell 56% year-on-year to a record low in May, according to the British Bankers’ Association, as tighter lending conditions choked off demand.
US consumers in a bad mood
In America, it’s a similar story. The S&P/Case-Shiller index of national house prices posted a 15.3% slide in April, the worst year-on-year fall since the index’s inception eight years ago. And don’t expect any improvement soon. With credit tightening – the 30-year mortgage rate has risen to 6.3% despite the Fed’s rate cuts – and the number of unsold homes on the market close to record highs, “homebuyers looking for the floor should be wary of the roof falling in on them”, as Lex put it in the FT.
Their slumping housing assets, along with high petrol price rises and increasing joblessness, have “overwhelmed” the majority of US consumers, said Ian Shepherdson of High Frequency Economics. The Conference Board consumer confidence index plunged to a16-year low in May. A slide in the number of people saying jobs were hard to find presaged another jump in the unemployment rate, while a sub-index of consumers’ expectations of the future hit a record low.
The latter is consistent with consumption – around 70% of the economy – falling by an annual 3%, says Shepherdson. Once the impact of the government’s tax rebates, which have until now given spending a fillip, subsides later this year, the growth outlook is grim. “Rate hike? You’re kidding,” says Lex.
Global inflationary pressures build
Yet given the recent rise in inflation and high commodity prices, expectations of a rate rise have grown despite the weak economy. And this week worries over global inflation mounted amid a round of price rises by some of the world’s biggest industrial companies. America’s Dow Chemicals is hiking prices by 25% and Korea’s steelmaker Posco by 20%; Rio Tinto has announced a 97% rise in the cost of iron ore for Chinese steelmakers.
“It’s clearly a global trend” that raw material costs are now being passed along the production chain, said Holger Schmieding of Bank of America. The key danger now is higher prices feeding through to consumers and triggering a wage-price spiral. As Merrill Lynch’s David Rosenberg put it, “we don’t envy the Fed” – or other central banks for that matter – “one bit”.