Alistair Darling has announced that the government must borrow its way to recovery and believes that it’s the best avenue for the UK economy in the long run.

The Chancellor of the Exchequer confessed that further national borrowing “may feel counter-intuitive,” but “will mean the bills we face as a country are lower” in the long run.

However, many believe that the levels of government debt are already too high, with cuts in public spending and tax rises required. The government has already raised borrowing during the recession by high amounts.

Following Mr Darling’s speech, a question-and-answer session was held, with the chancellor finding agreement with Mervyn King, the Bank of England Governor, stating that there were “no simple answers” when it came to the reform of big banks.

According to Mervyn King, their core business may need to be divided into other practices to prevent them from becoming so big that they aren’t allowed to fail.

Mr Darling was concerned that “we cannot have a regulatory regime that excludes the possibility of failure.”

He went on to state that the banking sector needed more competition, and when the government came to selling its bank stakes that were bought during the financial crisis, it would be hoping to develop greater competition.

Many are calling for a reduction to the borrowing and spending that has caused so much debt, but Mr Darling believes that withdrawing government support would be “wrong and dangerous,” and the country would have to make a big decision.

At a speech in London, Mr Darling declared that “we can resign ourselves to a decade of austerity, low growth and low employment, or we can embrace change, turn it to our advantage and seize the huge opportunities a global recovery will bring.”

He continued by warning that withdrawing government support to the economy “would put the recovery at risk and abandon people facing unemployment.”

In a bid to encourage demand during the recession, the government has pushed billions of pounds into the economy through its £175bn quantitative easing plan, cut the VAT rate and helping ailing banks.

According to Mr Darling, a great deal of work was still required to steer the country out of the recession, including three big steps.

“First, we must support the economy until we’re sure the recession is over. Some are tempted to think the crisis is over. It’s not. Banks all over the world are still dependent on government support.”

The second step would involve raising taxes to regain financial strength and taking “tough choices on public spending for the years ahead”.

He added, that it “will mean cutting costs, cutting waste and cutting lower priority budgets, while continuing to invest in our priorities and our future.”

His third step would involve a government plan of growth.

“We need growth, because when we grow, the economy becomes bigger, we all become richer as a country, and it gets easier to pay back debt.”

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.”

Famous celebrity chef, Antony Worrall Thompson, has closed four restaurants and made sixty of his staff redundant.

The chef visited each of the four affected businesses on Friday in order to tell the staff that they no longer had jobs because of falling sales and problems getting bank loans.

The chef has two other restaurants, and is having to use his personal savings to keep control over them.

What Mr Worrall Thompson had to say…

Mr Worrall Thompson said he: “experienced an unexpected but decisive fall in revenue across the business from September 2008.

“The decision to go into administration has not been taken lightly.

“The company started in 1997 with Notting Grill launching in 2001 and since then we have all worked hard to build a loyal team of employees, grow the business and create a solid relationship with our suppliers.”

He also said that the decision was made after failing to raise £200,000 from his bank in order to tide him over.

“Even though November and December sales were down on the previous year, five of the seven businesses were profitable. However, the first quarter of the year is always a hard one in the hospitality business and additional funding was required to ease our continuing cash flow issues,” he said.

“Our request for funds has not been supported, making administration a difficult decision but an unavoidable one.”

While being interviewed by one newspaper, he also claimed that he was “furious” that he had to tell staff that they had to find work elsewhere. One employee has been working for Mr Worrall Thompson since 1983.

“It makes me cry. It is just appalling…I am furious, to be honest, that the banks didn’t support me,” he added.

How he found his fame…

The TV chef made his name on BBC cooking programmes like Ready Steady Cook.  He opened his first restaurant in 1981, which was reputable for only serving starters and deserts.

Since then, his restaurants have gained him many awards, such as the Mouton Rothschild Menu Competition, and the Meilleur Ouvrier de Grande Bretagne (MOGB).

Now, after four of his restaurants are closing, the only places that will remain open are the Windsor Grill in Berkshire, and the Kew Grill in south-west London. He will also keep his delicatessen, Windsor Larder, open.

The chef has said that he could have saved all of his businesses if the banks had been willing to accept his offered guarantee of his home, but they were unwilling to take such a risk.

He said: “we did a cash-flow forecast for the end of the year and it was fine.

“But we needed looking after for the first four months of the year and the banks just didn’t want to play, not without me giving horrendous personal guarantees that I wasn’t prepared to do. I am getting to an age where I can’t afford to lose my house.”

Have your say

Leave your comments here.

After a 16 year high, UK inflation fell in October, as oil and transport costs, as well as fuel prices, fell.

The Consumer Price Index (CPI), which was at 5.2% in September, has fallen to 4.5% in a month. According to the Office for National Statistics (ONS), this is the biggest month-on-month drop in 16 years.

The Retail Prices Index (RPI) also fell from 5% to 4.2%, its biggest fall since 2003. This index includes house prices, and is often used for agreeing pay settlements, or calculating the up rating of benefits like pensions.

Core inflation, which includes the likes of food, tobacco and alcohol, fell from 2.2% in September, to 1.9% last month.

The ONS has said: “The largest downward pressure on the CPI annual rate came from transport costs where the price of fuels and lubricants fell this year but rose last year… The decrease this year was triggered by a sharp fall in the price of crude oil.”

Other things that may have contributed to the decrease are the fall in prices of both air and sea transport, and from food and non-alcoholic drinks, as the prices of meat were cut in the supermarkets.

The UK economy shrank for the first time since 1992 this year, falling by 0.5% in the third quarter of 2008.

The Bank of England has said inflation could fall below its target of 2% next year, and could even drop as low as 1%.

All of this led to the Bank of England lowering its key Bank Rate in October to just 3% – its lowest level since 1955.

Chief economist at the British Chambers of Commerce, David Kern, said: “Following these [inflation] figures, it is clear that UK interest rates will be cut further, most likely to 2% in early 2009.
“One cannot rule out rate cuts below 2% later next year.”

The slowing UK economy is also pulling down cost-of-living prices, due to falling food and fuel prices. The fact that crude oil is remaining at under $60 a barrel is primarily responsible for decreased fuel prices.

Senior economic advisor to Earnest & Young ITEM Club, Hetal Mehta, has said: “With commodity prices falling and the economy shrinking fast, inflation is going to undershoot the 2% target by the middle of next year.
And while it is still unlikely on the CPI measure, the prospect of deflation cannot be ruled out.”

Figures from the ONS also show that output prices (the prices of food leaving the factory) dropped by 1% in October.

Input prices, on the other hand, (the cost of the raw materials bought by the manufacturer) dropped by 5.6% in October, the biggest drop in 12 years.

The Governor of the Bank of England, has admitted that it’s very likely that the RPI will reach negative percentages next year.

The Bank is also expected to drop its interest rates to 2% in December, its lowest level since the 1930s.

Although a short period of deflation would not be too bad, a prolonged period could be disastrous, as consumers hold off buying goods thinking they will be cheaper later. This can lead to firms selling less and wages being cut, and overall, less money to spend meaning demand falls even further.

The Bank of England is warning that Britain has probably entered a recession which is likely to continue well into 2009.

In the Bank’s Quarterly Inflation Report, it has warned that the economic landscape has dramatically altered since August, and it now predicts that the UK’s economy could shrink by a further 2% over the next year, and to sink to 1% by 2010.

Mervyn King, the Bank of England’s governor has said: “[It is] very difficult to know precisely how long we’ll be in recession…I think we probably are in recession now.
This is a difficult and unprecedented time, but we will come through this… We will come out of recession and get back to a period of low and steady inflation and economic growth.”

This comes after records show that unemployment has hit its highest levels in 11 years, while the value of the pound plummeted further on international markets.

The Bank’s central projection is for economy to contract sharply next year. This however, is subject to change if the government introduces further fiscal stimulus to the economy.

Ross Walker from the Royal Bank of Scotland has said that markets were surprised by how big the fall in inflation that the Bank of England had projected was, but he added that he believes: “conditions are going to get worse before they get better.”

Just last week, the Bank of England shocked the country by cutting its UK interest rates to 3%. Mr King said reasoning behind the sharp fall was “because the facts had changed”, and not because the Bank was caught unawares by the crisis.

If the Bank’s rates do fall below 2% as predicted, this will be their lowest rate of interest since it was set up in 1694.

Mr King also admitted that Retail Price Index, including house prices, could fall into negative percentages as interest rates fell. The fact that oil prices are still falling will not help matters. They are now well below $60, less than half the price it peaked at during the summer.

Charles Bean, deputy governor, predicts that the contraction of the economy should be similar to the recessions in Sweden, Finland and Norway in the 1990’s, which were quite short. He also emphasised that the government have responded relatively quickly to the threat, therefore the effects of the recession shouldn’t be extended too far.

Putting a positive spin on the 20% decline of the pound, he said it could help boost exports and pull the economy out of recession.

The governor pointed out however, that if the value of the pound falls much further, there could be further inflation in the future.

As part of its action against recession, the government announced it would spend billions to protect financial systems and boost the UK economy.

According to Mr King, there is stronger argument for fiscal stimulus than before, because the banking crisis meant that monetary policy was less likely to be effective.

However, he has also warned that any fiscal stimulus must be temporary and consistent with the long-term path of fiscal discipline, otherwise long-term interest rates would rise, undoing some of the effects of any economic increase.

Prime Minister, Gordon Brown has also said that he would have to employ “very special means to deal with special circumstances” and that the economic changes needed to be world-wide in order to be most effective.

It is thought more information on this will be included in the Pre-Budget Report, due out on 24th November.

After yesterdays shock movement by the Bank of England to reduce interest rates to 3%, its lowest level since 1955, lenders today come under pressure to reduce mortgage rates to reflect this.

Chancellor Alistair Darling has called for banks to reduce the interest rates they are charging their borrowers, but at the moment, only Lloyds TSB and Abbey have said they will pass this cut on in full to their customers. Many announcements from other banks are expected later today.

Nearly all tracker mortgages have been withdrawn from new borrowers as lenders have to now consider what rates to reintroduce these mortgages at.

Chancellor Alistair Darling has called for banks to try to reflect the lower rates to their customers, and has said: “I think it’s essential that the banks do pass on the benefit of lower interest rates to people and to businesses. Banks need to understand that they need to help their customers.”

Chair of the Treasury Select Committee told BBC News: “The banks are the fly in the ointment. The banks got themselves into this problem and it was the taxpayers who rescued them.”

In interviews, Mr Darling is refusing to reveal whether or not he can force banks to cut their rates, even those that are largely owned by the government.

Before yesterday’s dramatic rate cut, Lloyds TSB and Cheltenham and Gloucester said that they would pass the reduction on in full to their Standard Variable Rate (SVR) customers. After the cut had been announced however, only Abbey announced it would pass it on to all its existing customers on variable rate mortgages.

Other major high street lenders, such as HSBC, HBOS and Barclays banks, have said that their ‘variable rates’ are under review.

Nationwide building society has said that it is going to ‘monitor the markets’ before it makes its decision over rate reductions.

According to the Council of Mortgage lenders however, the major problem is that the key to solving mortgage costs is not the Bank of England’s base rate, but the rate at which banks lend to each other (London Interbank Offered Rate – Libor).

Ray Boulger from mortgage brokers John Charcol has said: “This will be a key figure to watch in terms of assessing how much of the cut is likely to be passed on in rates offered on new tracker mortgages and in lenders’ SVRs.”

Today’s daily Libor figure will certainly be watched as it is expected to still be well above the Bank of England rate, but everyone will be wondering how far it will have fallen since yesterday.

The UK’s financial watchdog has reported that the number of people who are losing their homes because they cannot keep up with their mortgage repayments has climbed sharply.  In the second quarter of this year, the number was over 11,000, a 71% increase on the year before.

The Financial Services Authority (FSA) has said that the number of people struggling to clear their home loan arrears has risen even though the Land Registry figures are showing that house prices are still falling in England and Wales. The Bank of England is predicting still more problems for homeowners.

The UK financial watchdog also added that the number of people falling behind on their mortgage repayments over at least three months, has been rising steadily for over a year, and is 16% higher than a year ago.

Some, but not all of these will lead to repossessions, and therefore homeowners are being urged to contact their lenders as soon as they find that they are struggling to make any repayments to their mortgages.

Since the FSA started collating figures at the beginning of 2007, this is the second time it has released statistics of this kind, based on data from 300 different mortgage lenders and administrators.

The Council of Mortgage Lenders has also predicted that in 2008 45,000 homes will be repossessed in the UK, up from 27,100 last year.

This new information backs up what others have been saying about the state of the housing market over recent months – that the number of new home loans has dropped and banks are being  more cautious about who they are lending to due to the credit crisis.

“Significantly fewer” new loans have been given to people who can now only just afford a deposit of 10% of the value of their property. This is compared to a peak in early 2007, where homeowners were able to put down 15% deposits.

People taking out loans who have a blemished credit history between April and July of this year represented 2.1% of new lending; this is compared to 3.4% last year.

In other figures released by the Land Registry, a 2.2% drop in house prices in England and Wales can be seen. This means that the average home is now worth £168,814, an 8% decrease on last year.

Even London is feeling the effects of accelerating annual decreasing house prices. Their prices have fallen by 6.1%, though this is nothing compared to Wales, who have seen the biggest fall of 10.7%.

House prices in the UK are now falling faster than those in the US.

The Bank of England’s Financial Stability Report (FSR) has estimated that around 500,000 homeowners in the UK are now in negative equity due to the 13% fall in property prices in the UK since last October.

It is also believed that this number could rise to 1.2 million if house prices drop a further 15% in the next few months.

Around 85,000 British tourists are stranded abroad after the UK’s third largest package holiday group, the XL Leisure Group, which operates XL airlines, went into administration, causing all flights to be cancelled and its aircraft grounded.

The Civil Aviation Authority (CAA) said that it was making arrangements to help customers of the four tour companies within the XL group.

David Clover, a spokesman for the CAA, said: “In respect of people who are currently abroad we’re making arrangements and working very closely with the travel industry to organise repatriation flights.

“Clearly though, with XL Airways no longer operating, we’re having to bring in substitute aircraft to bring people home.”

He said that package deals are covered by the CAA’s Air Travel Organisers’ Licensing (ATOL) scheme and those customers will be offered repatriation or their money back if they are on of the 200,000 people who have and advance booking. He advised those with future flights to check their insurance polices, and with their banks or credit card companies about refunds.

Unfortunately anyone who booked directly with the airline or on XL.com will face a fee. However, the CAA says they are in the minority.

The group is the latest travel business to face financial hardship, as the industry struggles with high fuel costs ad an economic downturn.

“As the travel industry matures in Europe, there was always going to be pressure on those operating in the mid-market,” said Last.minute chief executive Ian McCaig.

“You don’t have enormous scale or specialism, so there was always going to be pressure. Economic conditions have really just accelerated that process in the case of XL.”

One XL pilot, who didn’t want to be named told the BBC that he was “completely shocked” when he heard the company had gone bust. He said he was only told the news this morning, and blamed fuel costs for the demise.

The group who last year carried 2.3 million passengers, and has 1,700 employees worldwide left this statement on its company website:

“The companies entered into administration having suffered as a result of volatile fuel prices, the economic downturn, and were unable to obtain further funding.”

Bob Atkinson, a spokesman from Travel Supermarket said XL’s demise would be a blow for the travel trade.

He said: “They are a very large operator and this will send serious shock waves through the industry.

“And what it’s going to do more than anything, it’s going to highlight how precarious the airline industry is at the moment.”

Early this morning, Northern Rock announced losses of £585.4m for the first six months – much higher than expected. Much of the loss came from the charges it takes to cover losses from struggling mortgage borrowers.

However, the mortgage lender did manage to repay £9.4bn of a loan from the Bank of England, reducing the amount it owes to £17.5bn.

The government, which nationalised the lender in February, will give £3bn cash injection to bolster its finances. The money for the injection will come by pausing repayments of the huge taxpayer loan made to the bank, of which about £3bn will be converted in to equity.

BBC business editor Robert Peston said: “To put it another way, the nationalised bank is having a mega rights issue that taps its one shareholder”.

“It is similar to what other banks have been doing recently, where they have been having rights issues.”

“But the £3bn is taxpayer’s money – that is money that is very much at risk.”

Northern Rock revealed that the total percentage of it residential mortgage customers in arrears had risen sharply from last year. In June 207, the figure showed 0.38% of mortgages were in arrears, but it has now risen to 1.18%. However, this is lower than the Council of Mortgage Lenders average of 1.21%.

The company have said that this is due to more demanding economic and market conditions, which have be exaggerated by reducing the number of their customers by 15%.

House possession numbers have risen from 2,215 to 3,710 – an increase of 67 percent, and represents 0.56% of all mortgage accounts.

The company said that this is because it is moving to repossess properties faster when it is clear they cannot maintain their mortgage payments.

Northern Rock was floored by the global credit crunch, when its method of financing mortgage loans – borrowing cash from wholesale markets – dried up.

The bank, which was at one time the UK’s fifth-biggest loan provider, was taken into public ownership when it failed to attract a suitable buyer from the private sector.

British Airways has blamed the credit crunch for a massive drop in year-on-year profits, stating that aviation industry has faced the “worst trading environment ever”.

The carrier made a profit of £37 million in the three months to the end of June compared to last years £298 million for the same period – an 88 percent drop. In an effort to reduce overheads, BA said that it would cut 3 percent of flights this winter.

BA says that its fuel bill would be £3 billion in the year to the end of March – the equivalent of £8m per day. However, BA insists that the company is “well prepared” to control its costs.

BA chief executive Willie Walsh is fully aware of the problems faced by the carrier: “We are in the worst trading environment the industry has ever faced,” he said.

“The combination of unprecedented oil prices, economic slowdown and weaker consumer confidence has led to substantially lower first quarter profits.”

Mr Walsh added that the airline has managed to hedge some of its fuel costs in the quarter which “mitigated the impact” of rising bills, although they still rose by 49 percent.

Although BA has reduced the number of flights in the winter, BA has said that it will not “compromise its network”.

Earlier in the week, BA announced that it was in merger talks with Spanish airline Iberia. However, the proposed deal would take months to finalise. The deal is seen as an attractive proposition for BA as it would allow it to reduce costs.

The results are he first full quarter to include operations at Heathrow Airport’s Terminal Five – which BA has exclusive use.

After the chaotic opening which led to hundreds of cancelled flights, lost baggage, and thousands of unhappy customers, BA says the Terminal is going “from strength to strength”, with more than six million passengers through the gates since March 27th.

Terminal Five was deemed a national embarrassment, and resulted in some executives leaving both BA and Heathrow operator BAA.