Whilst the general financial atmosphere is improving and optimism growing, it is too soon to announce that we are in the process of recovery, according to experts at Ernst and Young Item Club.

The influential professional services firm expects some growth towards the end of 2009, but this growth should begin to struggle, with 1% expected growth for 2010.

They also predicted that customers repaying debt will grow slower than first anticipated and impending tax rises will follow the election.

BT Business research predicted a more optimistic outlook, declaring that small businesses are positive about the forthcoming year.

In September, BT Business conducted a survey of over 7000 small businesses and found that 75% believed their business would see an upturn in 2010, with 61% confident about their business’ prospects.

Professor Peter Spencer, Chief Economist from the Item Club, issued a wake-up-call to all those getting carried away with the optimism of recovery.

He warned, “there could still be substantial pain to come for corporates and consumers.”

“For a sustainable recovery the UK economy needs world trade to pick up and there is still not much sign of that happening.”

One of the factors holding back growth is that the VAT rate will return to 17.5% from its current level of 15% on 1 January, a change which may see consumers making purchases before the New Year.

Several other factors which will hold back growth lie on the horizon. An increase in national insurance contributions, the new 50p tax rate, the termination of the car scrappage scheme, tighter government spending and the return of stamp duty on housing are all due to hit the country.

Judging whether the recovery is happening, on the way or unlikely is difficult to forcast.

Professor Spencer went on to tell the BBC that the recent economic data has been “very mixed,” adding, “the stock market is absolutely rampant, industrial surveys all back in positive territory, but it’s yet to show through in hard data for output and things like that.”

“And when it comes to lagging indicators like unemployment, I’m afraid it’s going to be ‘feel bad’ for quite some time to come.”

On Friday, the official statistics for the Gross Domestic Product (GDP) are released, with many expecting no economic growth at all.

GDP is a measurement of the services and goods produced in a country, and since the first quarter of 2008, the UK GDP has been in negative figures.

The Bank of England has focused on quantitative easing, an act of pushing money into the economy. Professor Spencer feels that this has been of little success, with the little improvement on bank lending, going on to complain that “instead, the banks appear to have used much of the money to rebuild reserves and improve liquidity.”

Official statistics show that one of the main measures of inflation has reached its lowest point since September 2004, another sign of sterling weakening. The annual rate of 1.1% in September was lowered from 1.6% in August by the Consumer Prices Index (CPI).

A separate measure of inflation conducted by the Retail Prices Index (RPI) found that mortgage interest payments and housing costs also dropped, from -1.3% to -1.4%.

The pound also reached its lowest point in the past six months when it fell 0.5% against the Euro to 1.0628 Euros and to a five-month low of 1.5730 US Dollars.

Weak

Duncan Higgins, a senior analyst for Caxton FX, felt that “this is bad news for the pound.”

“The CPI figures will weigh heavily on the UK currency and will continue to discourage investment.”

A report conducted by the Centre for Economics and Business research predicted UK interest rates would not rise above 0.5% until 2011 and fail to meet the 2% mark until 2014; a further damnation to the outlook for the pound.

Meanwhile, the strength of the UK economy was dealt a further blow last week when it was revealed that industrial output dropped in August.

A prediction for the GDP had to be recalculated by the National Institute of Economic and Social Research after the UK economy failed to grow during the June/September quarter.

However, the economy is still very “frail” according to the British Chamber of Commerce (BCC), despite business confidence improving.

In an effort to sustain a stable broader economy and prices, the Bank of England is making efforts to retain 2% CPI inflation. Should the CPI inflation drop below 1%, the governor of the Bank of England must provide a written explanation to the Chancellor, Alistair Darling.

High energy prices a year ago, in comparison to lower energy prices this September are being blamed for the recent fall in inflation. The Office for National Statistics (ONS) reported that electricity, gas, and other fuel bills tumbled by 7.3%. Energy costs have started to level more recently, with little change from August to September.

Jonathan Loynes from Capital Economics predicted that we can expect to see CPI back at the 2% mark by the start of 2010, due to increased energy prices and VAT returning to 17.5%. He does believe that a “huge amount” of unused production capabilities would keep inflation down and “keep alive the threat of a period of outright deflation late next year or beyond.”

In contrast, Keith Wade of Schroders UK forecasted that it “probably will be the low point in inflation.”

The Council of Mortgage Lenders (CML) has revealed that the number of new mortgages granted for August is down by 3,000 from 56,000 in July to just 53,000.

Despite such a large fall in granted mortgages, this is still 29% higher than last year’s figure for August.

The CML believe that house sales may have reached a plateau, as most first-time buyers still have to provide large deposits.

Overall, the total value of mortgage lending for buy-to-let and remortgaging for the past year is down by 36% on last years figures.

Long Recovery

The CML’s economist, Paul Samter believes “house purchase activity has revived from its moribund state at the beginning of the year.”

“It will be a drawn-out recovery process with seasonal ups and downs, but house purchase activity is now on a firmer footing.”

According to the CML’s figures, first-time buyers need to find on average 25% deposit in order to receive a home loan.

Regardless of whether a borrower is a first-time buyer or not, two-thirds of all mortgage deals require at least a 25% initial payment.

Relaxing

The Bank of England has claimed that the number of new mortgages approved in August, but not lent, has fallen for the first time in eight months.

From 52,317 approvals, down from 52,404 in July, is a sign that levels may be beginning to level off in the coming months.

Data shows that the number and value of house purchase loans is higher than a year ago, the total value of mortgage lending has dropped by a third.

Standard variable rates are very low, giving borrowers much less incentive to remortgage their house or seek out fixed rate mortgages elsewhere. Buy-to-let mortgages are also down  on a year ago.

“At £12.3bn, gross mortgage lending - which encapsulates all mortgage lending activity, including house purchase, remortgage and buy-to-let lending – declined 36% from August 2008,” the CML reports.

House Prices

The autumn of 2007 saw the onset of the credit crunch, with house prices taking a sudden downturn. Over the past few months, house prices have been steadily rising, giving hope that the recent recovery may become more prolonged.

House prices rose by 2.8% in the 3 months leading up to September, in contrast to the 3 months prior according to the Halifax; the first quarterly increase for two years. Further support to the encouraging recover was made when the Nationwide confirmed that house prices have risen continuously for the past 5 months and have returned to the level of September 2008.

Sales have doubled between January and August and the market seems much more stable in comparison.

Experts have warned, however, that the rise in house prices is supported by the shortage in new properties being put on the market. If there is a sharp rise in houses placed on the property market, the rise in house prices may come to a sudden halt.

Barclays have seen a jump in its shares after a report that they will not need more money if it joins the Treasury’s asset insurance scheme.

Shares in the bank rose by 24.1%, and have surged by 60% over the last week.

The bank was subjected to an “extreme stress test” by regulators, who concluded that they do not think the bank needs fresh capital.

The Asset Protection Scheme attempts to insure the riskier bank assets from further loss by using government money to insure them against it.

Barclays released a statement saying that it: “confirms, following [the stress test] and discussion with the FSA, that its capital position and resources, after exposure to the stress, are expected to continue to meet capital requirements which the FSA published on 19 January 2009.”

The Chancellor is hoping that the protection scheme will help restore confidence in the entire banking sector.

Not Out of the Woods Yet

Lloyds Banking Group and the Royal Bank of Scotland are already a part of the scheme. Lloyds shares have already increased by 9.3%.

However, the government has already taken over a 65% stake in Lloyds and has said it will insure up to £260 billion of the banks toxic debt. It is therefore unlikely, if the Barclays report is anything to go by, that Lloyds will require any further money from the government either.

Somehow, Barclays bank is among few that have been able, so far, to remain profitable during the financial difficulties, much unlike its peer companies, like Lloyds and RBS, which have recorded the biggest financial loss in corporate history and have therefore been part-nationalised.

Barclays was apparently considering earlier this month whether or not to join the new government scheme.

The FSA however, after conducting the review on the bank are not commenting on the findings.

The Bank of Ireland has also said it won’t need more loans from the Irish government after it got 3.5 billion euros of aid in February.

What Do You Think?

We would love to know your thoughts and opinions. Leave your comments here.

The Citizens Advice Bureau has warned that the typical UK house owner seeking financial help has no realistic hope of paying their debts back in their lifetime.

According to the Bureau people seeking advisors help owe an average of nearly £17,000 which typically would take over 90 years to pay back.

The most common reasons people are giving for being in debt in the first place are: low incomes; over-commitment; job loss; and illness/disability.

Is There An Alternative to Bankruptcy?

In April of this year, a new alternative to bankruptcy will come into practice aimed at people with debts of less than £15,000 but without much excess income or assets belonging to them.

A third of CAB debtors will qualify for this new relief, but CAB are also asking for fair treatment by lenders and creditors, and more government schemes to help those in debt without having to take them to court.

CAB have researched the financial situation of over 1,400 people in England and Wales who visited the charity for help managing their debt in July of last year.

They also carried out similar studies in 2001 and 2004, but say that the most recent figures show that the debt crisis is deepening, as now, on average, clients owe two thirds more than they did in 2001.

On top of this, over half the clients recorded had debts on priority bills, such as mortgage, rent, fuel bills and council tax. One tenth had over 10 credit card debts in the form of personal loans, overdrafts and plastic cards.

How Do We Solve the ‘Root’ of the Debt Problems?

CAB chief executive, David Harker said: “Low income, combined with irresponsible lending, unreasonable debt collection practices and badly-informed financial decisions are at the root of many of our clients’ debt problems.

“For many, there is little prospect of their income increasing or their circumstances changing. The reality is that they are condemned to a lifetime of poverty overshadowed by an inescapable burden of payable debt.”

Added to this, the majority of the clients seeking help were poorer than the average home owner, and job losses across the country since the research was conducted is only adding to people’s problems.

The findings of the work show that the main problems seem to be with housing costs, including things like fuel and water bills, and the growing number of houses with mortgages or secured loan arrears.

Other Research Sings the Same Tune

The Insolvency Service have also released figures showing how badly some companies have been hit by the sudden recession.

These figures show that corporate insolvencies rose by 220% in the final quarter of 2008 compared with the same time in 2007.

However, the number of people declares insolvent was roughly the same in 2008 as it was a year earlier.

What Do You Think?

What do you think about the information in this article? Leave your comments here.

Chancellor Alastair Darling has revealed that while he may be planning on cutting taxes in his budget, the government will also be borrowing record amounts in order to reduce the effects of repression as much as possible.

According to his pre-Budget report, high income homes will also face more tax, and National Insurance contributions are also set to rise across the board, as part of his “exceptional” measures in order to reduce the effects of recession next year.

Alcohol, tobacco and duty prices are set to rise enough to offset the VAT cut from 17.5% to 15%.

Conservative Chancellor, George Osborne, has accused the Labour party of trying to bring Britain “to the verge of bankruptcy” as the plans detailed in the pre-Budget plan will double national debt, which is set to reach £118 billion next year.

He has accused the government of creating a “huge unexploded tax bomb timed to go off at the time of the next economic recovery.” And also that Mr Darling had offered “temporary tax giveaways paid for by a lifetime of tax rises on the British people,” and that the UK had been “mortgaged to bail out the mistakes of the past.”

Liberal Democrat treasury spokesman, Vince Cable has also said that the government’s plans would not be enough to boost consumer spending, and that they would do better to “put money directly in the pockets of low paid workers by cutting their income tax.”

Mr Darling has also reduced the predicted growth of the economy for next year from 2.75%, to between -0.75% and -1.25%, the biggest downward revision recorded.

On the other hand, he has said that the government will inject either £20 billion or 1% of GDP into the economy in order to get things moving again, leading to an increase in government borrowing.

There is also expected to be a cutback in government spending, with the rise predicted to be at 1.2%, lower than in recent years.

The 2.5% VAT cut will come into effect on Monday, just in time for the peak in the Christmas shopping period, and will aim to put £12.5 billion back into the pockets of consumers over the 13months during which it will last.

Also, on top of their £10 bonus, pensioners will receive a one-off payment of between £60 and £120 in January.

The increase in duty on alcohol, tobacco etc however, will be permanent.

In measures that aim to try and get back some of the VAT that the government will be losing, top rate tax will increase to 45% in 2011 for people earning over £150,000 per annum from April 2011, and all National Insurance contributions for both employees and employers will be raised by 0.5%.

The starting line for National Insurance and income tax line will be brought into comparison with each other so that anyone earning less than £20,000 per year will not pay more contributions.

In defence of borrowing rate being almost double for next year than 2008, the Chancellor has said that “in these extraordinary circumstances allowing borrowing to rise is the right choice for the country. Taken together these steps will ensure money flowing into the economy when it is needed most, but we can reduce borrowing when growth returns.”

Other measures include speeding up the introduction of planned rises in child benefits, along with measures that aim to help small businesses struggling due to the credit crunch.

He has also announced that drivers will face a more gradual introduction of new vehicle excise duty, at only a £5 increase per vehicle next year.

And, of course, there was mention of work on motorways, schools and repair to council houses by bringing forward £3 billion of state spending.

Also for home owners, a scheme that covers mortgage interest payments for those that have lost their jobs will cover up to £200,000 of mortgages.

The other major change in order to try to boost the economy is that this year’s £120 income tax personal allowance per year for basic rate tax payers will stay and be increased to £145.

Recession in the UK will be longer and tougher than originally suspected according to business group CBI, which estimates that the economy will shrink 1.7% in 2009. This is hugely different to the 0.3% growth that was predicted in September.

The group also believe that unemployment could peak at 2.9million by 2010, compared to the current 1.8 million total.

Lord Mandelson, Business Secretary, defended the government’s plans to increase borrowing in order to try to boost the economy by saying: “We have to take every action we can as a government.”

He also said that the current recession is not the government’s fault, and that it is their job to do everything possible to make the recession “as short and as painless as possible”, adding that “now people will say but you’re resorting to borrowing in order to deliver the stimulus that’s needed. My answer to that is what is the alternative?”

Unite, are said to be drawing up a 10-point plan to invigorate the UK economy. This will include an increase in public spending; a halt to house repossessions; and a call for over a million affordable new houses to be built.

Along with these changes, Unite also want more support for manufacturing, tighter regulations on energy firms’ profits, tighter regulations of the financial sector and increased worker rights along with many more changes they believe will boost our current economic state.

Although the CBI report said that it hoped the recession would be “shallow”, October’s banking sector turmoil suggests otherwise.

Between July and September this year, the UK economy shrank for the first time in 16 years, suggesting we are in a repression, though technically, this can’t be confirmed until the fourth quarter statistics are in, it is expected that the fall in economic growth will continue.

The CBI expects that the economy will continue to contract by 0.8% in the final quarter of the year, and expect the economy to continue to shrink in the subsequent three quarters, before beginning to recover in 2010.

CBI’s deputy director general, John Cridland, has said that problems with the banking system over the last couple of months have sent consumer and business confidence plummeting.

He said that: “given the speed and force at which the downturn has hit the economy, we have reassessed and downgraded our expectations for UK economic growth, but the fast-moving and global nature of this crisis means it is impossible to look far ahead with any certainty.
“What is clear is that the short and shallow recession we had hoped for a matter of months ago is now likely to be deeper and longer lasting.”

According to Mr Cridland, the slowdown in the economy is due to a “double whammy”.
“First of all the banking crisis had really deep effects on the availability of credit for business – nor only credit from the banks, but credit insurance as well – and that is now proving troublesome for an awful lot of businesses small and large.
“Alongside that, the impact of relentless bad news every day on the news has caused people to stop spending – companies as well as individuals – so there’s a sharp fall in demand for products and services and businesses having to batten down the hatched.”

The Bank of England has shockingly revealed today that it is to cut its interest rates in the UK to 3%, their lowest level since 1955. This follows an emergency cut just last month, from 5% to 4.5%.

It was expected that they would be cut again by the end of the year, but economists predicted this would be by the same amount again, which would leave us with 4% interest rates.

The BBCs economics editor has said that the size of the cut, which is the biggest since 1981, shows the Bank’s concern that the UK is headed for a long recession.

Banks are however, expected to take some time deciding whether to extend this cut to mortgage holders and savers.

Shortly after these cuts were announced the European Central Bank also announced further cuts on its eurozone interest rates to 3.25%.

In reference to the Bank of England’s statements regarding the cuts and the general state of the economy, BBC economics editor Hugh Pym has said: “It is clearly very concerned about the possibility of a prolonged recession in the UK.
“The risks of high inflation have now evaporated, and because the bank is worried that inflation will now fall well below its target, it has felt the need to come up with this cut, which is much bigger than expected.”

This cut should help those with tracker mortgage deals, which is estimated to be about 40% of mortgage holders, by roughly £134 on around £150,000 mortgages.

Prime Minister Gordon Brown was asked about the problem on Wednesday in the House of Commons. His reply was: “We want the banks and building societies to pass on the interest rate cuts to their mortgage holders.
“What we’ve been trying to do over the last few weeks is get the liquidity into the system, recapitalise our banks and then get them to resume the lending that is necessary.”

As the level of the cut was so much higher than expected, mortgage lenders are expected to take some time to decide whether they will pass on the cuts to variable rate mortgages which, according to the Council of Mortgage Lenders, account for 10% of total home loans.

Lloyds has promised it will honour the 1.5% interest rate cut, but other major lenders are still undecided.

Customers who have fixed-rate mortgages however, will see no change to their repayments until they come to re-mortgage.

In general, business bodies and trade unions have welcomed the change, saying that it is bold, but should ease conditions in the credit market and allow banks to pass on their benefits to their customers.

The Institute of Directors (IoD) have said that rates could reach as low as 2% or less by this time next year. Chief economist Graeme Leah said: “the sooner we get interest rates down, the less is the risk of a long and deep recession.”

The 1.5% decrease in interest rates came after figures released this week provide further evidence that the UK economy is slipping into recession.

Such figures include those from the Halifax, showing a 2.2% fall in house prices since October, which now pushes the drop to 13.7% overall in the last year.

Activity in one of the UK’s major industries, the service sector, shrank in October for the sixth consecutive month. According to an index, the output from this service is its lowest since the poll began in 1996.

The manufacturing output fell for the seventh month in September according to the Office for National Statistics, its longest run of consecutive monthly declines since 1980.

Banks in the UK recoiled from commercial property lending, leaving investors in the sector facing record margins, rocketing arrangement fees and demands for greater equity.

On Friday a survey published by De Montfort University, recorded the highest ever interest rate margins for senior debt in every sector as well as the sharpest ever annual increase.

Average loan-to-value ratios for almost all sectors were the lowest recorded, and all organisations increased arrangement fees substantially, reaching their highest ever levels by the end of 2007. Since then, most investors report that conditions have not improved for borrowers.

According to the survey, bank lending to the property sector soared to record levels last year, before the market tightened as the credit crisis ended years of easy finance. Debt rose to a record £247bn in 2007, from £215bn in 2006, with around £200bn standing on the balance sheets of the lending banks.

The figure jumped 16 percent last year, partly owing to an estimated £11bn of debt that was intended to be scrutinised but that could not be distributed following the freeze on this market last summer.

RBS and HBOS are among the largest lenders to the marker, although the sector has been filled by banks and building societies of all types in recent years. HBOS, according to its 2007 accounts, amounted for 37 percent of total corporate lending to construction and property clients – around £40.4bn.

According to the Bank of England, Commercial property lending accounts for 38 percent of major UK banks’ lending to private non-financial companies, compared with 19 percent in 1998.

The fall in capital value of more than 20 per cent recorded in parts of the market over the past 12 months has got some analysts worried. There are fears that this is putting pressure on loans, potentially leading to defaults if the market decline continues.

The Bank of England, one of the sponsors of the survey, was relatively sanguine in its most recent financial stability report, saying that although property values may have increased the risk of commercial property loans held on balance sheets, there was no increase in defaults in spite of evidence of breaches of covenants.

While we hear news that inflation in the manufacturing sector has moved to its highest level since 1995, many people are starting to ask what inflation actually means to them. So what are the positive points and negative points of inflation?

Inflation is the change in the cost of an item or items over a given time span, normally 12 months, showing how the price of the said item has changed over the period. While it is safe to say that prolonged high inflation will ruin an economy, it is also safe to say that negative inflation or zero inflation also has the potential to cause major problems. Here we list some of the positive and negative aspects of inflation :-

Positive Aspects

Controlled inflation in any economy allows manufacturers and services providers to move the cost of the goods / service higher without pricing themselves out of the market. Inflation is a direct result of the supply and demand levels for a particular product. i.e. if there is little demand then the potential to move prices higher is smaller, yet if there is high demand and few providers, then those in the market can afford to increase their prices.

Increased prices mean increased income and so long as costs are kept under control it also allows the companies involved to increase the salaries of their workers. As incomes rises, more people will spend and the economy will continue to grow.

Inflation is also very important to the property market because inflation will allow rental charges to grow, and because the value of property is normally directly related to the rental income, this will keep the property market moving forward. Again, it is a controlled rate of inflation which is essential because when rental inflation moves out of synch with the market this can cause major problems.

Negative Aspects

While a controlled rate of inflation is good for the economy, a run away rate can have serious implications with costs racing ahead to levels which are unsustainable. The problem seems to occur when people have excess money in their pockets to spend and demand for products is pushed higher and higher. As the cost of the products moves higher there is a natural increase in costs with each element of the production chain wanting a share of the rise – including the workers.

When demand starts to fall many companies are left high and dry with costs which are unsustainable against the falling price of goods and competition. As more companies struggle we see more and more price reductions with many companies forced to sell goods at knock down prices. This can then move the economy into a vicious circle, where cost cutting means more jobs are lost, meaning less money for people to spend which then transfers into reduced sales then to more costs cutting, etc, etc.

Summary

While governments around the world will use different techniques to control inflation, one of the main tools in the UK has been interest rates where the authorities look to make borrowing more expensive to curb overspending, hence reducing demand and prices to acceptable levels. Where demand is falling the authorities would look to reduce interest rates to make borrowing cheaper, giving the consumer the opportunity to borrow and spend – increasing demand. At the moment we are in a very difficult situation in the UK because the cost of oil has increased, which has been passed down the line into business and onto consumers. So prices are rising while the economy is under pressure – a very very tricky situation.