Thursday, October 09, 2008

Recession looms as crisis continues

The financial stability of British local authorities has been called into question after it was revealed that they may lose millions of pounds tied up in Icelandic banks that have gone into receivership [BBC]. Dozens of councils had vast sums invested in Landsbankinn, one of several Icelandic financial institutions that have gone to the wall in recent days [BBC].

It is one of the first major signs of how the financial crisis has had a direct impact on Britain. While hundreds had been made jobless in the financial industry, following the collapse of Lehman Bros., the loss of millions from local government coffers may affect hundreds of thousands of British taxpayers. The Local Government Authority said it had identified at least 20 councils with money deposited in Landsbankinn with funds exceeding £1 billion. The Conservative party warned that the crisis may bring about tax increases and cuts in services.

Michael Portillo, a former treasury chief secretary, speaking on Sky News said today that “we’re all in for recession” and that Britain was “looking at a very tough period”. While he condoned the injection of cash into the banks to encourage lending he added a cautionary note. “We need to get back to a world in which people save for things instead of taking out loans” he said. It is not just one politician that sees a difficult time ahead. Despite a turn on today’s markets [BBC], with all the major indexes seeing moves up, financial commentators have warned that markets were not out of the woods yet. “Recession is staring us in the face”, David Buick, of BGC Partners, told the BBC this morning.

The affects of the continuing financial crisis can already be seen on the streets of Britain. Retailers, struggling to move stock, have been cutting prices significantly. Debenhams, a major UK retailer, was marking many items down, some as low as 70% off the marked price. House of Fraser was also trying to drum up trade with a sale. Hundreds of products were reduced with cuts of between 20 and 50%. HMV has cut prices by half on many titles. Even chart DVDs were selling at £8 instead of the more usual £12-16. Several well known retailers have already announced severe losses in profit. BHS saw a 34% fall in annual profits [BBC]. and Marks & Spencer also saw big falls in profit [BBC]. WH Smith has said their profits had flattened but its chief executive said the firm had "delivered another year of good profit performance" [BBC].

It is the housing market that has been badly hit by the credit crunch. With few loans being handed out there is a slump in demand which in turn has forced prices down as much as 13% in the last year according to a report from Halifax today [BBC]. And as those with mortgages struggle to make repayments there is an increase of For Sale signs lining Britain’s streets. For those with any surplus cash there are indeed some bargains. From cars to houses, from DVDs to DVD recorders, consumers have a wide choice of attractive offers. But most are tightening their belts. The uncertainty in the economy is making people think how they spend what cash they do have and how they use available credit. Most people will be more focused on how they are going to pay off existing debt and bills.

As each day rolls by with more businesses closing and stocks crashing, there is the constant dialogue from television pundits debating the effects of the cash injections and rescue packages. But as Richard Quest intimates they “all expect financial markets to react with a degree of certainty” and “don’t see the crisis for what it is”. Writing on his blog for CNN, the correspondent says it may take many months before any real effects are seen. “It will take weeks if not months to bear fruit ... and we can’t point with any certainty to the moment when this thing will turn round - at least not until we see evidence of it” he says. He has a certain incredulous view of those who think the effects will happen instantly. “Those who believe that there is a single “eureka” moment are na├»ve” Quest insists [CNN]. But while he thinks that the bail out plans and rescue deals will help “damp down the fires” in the financial markets, he says “more interest rate cuts will be needed to increase consumer confidence … and I am NOT saying it will be business as usual. More banks will fail or merge; the wider economy will now start to rock like a ship on stormy seas” [CNN]. Lets hope it doesn’t hit the rocks!

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