The US unemployment rate has risen above 10% for the first time in 27 years, leaving the US in a state of despair.

President Barack Obama will hold a jobs summit on Thursday, focused on job creation.

Although he has included business leaders amongst the 130 experts attending the summit in Washington, Republicans in Congress will opposed to any major spending plans.

President George W Bush has already frustrated them by spending billions on bailing out the banks and car makers.

The “big government” image and creating big financial defecits to be paid for by future generations are unpopular in Washington.

Economy.com’s Mark Zandi believes deficits are a major worry, but we can’t afford to be concerned about it now.

“That’s a problem not for 2009, not for 2010. That’s a problem for 2011, 2012 and beyond,” he says.

“We have to make sure that we don’t go back into a recession, because if we go back into recession, the cost to taxpayers will be even greater.”

“The deficits will be measurably larger, so I think it’s important to spend more money now.”

According to Mr Zandi, government spending needs to be aimed at assisting local government offices, as with tax funding falling, many employees are at risk of losing their jobs.

President Obama is on the look out for new ways to combat unemployment.

Unemployment benefits usually run out after six months in the US, but have been extended because of the highest unemployment rates.

Mr Zandi believes continuing with providing benefits to the unemployed as essential to maintaining demand, as those with no money make no purchases.

That situation could develop into a ‘catch-22’, downward spiral, as consumers that don’t consume, results in businesses cutting their workforce, causing more unemployed with no money to spend.

Another area where Mr Zandi feels the government can make a unique contribution is providing credit to small and medium-sized businesses.

Banks are still cautious over lending after the credit crisis, but have always given capital to start-up companies to help them expand, and these new businesses usually provide America with the majority of new employment.

Mr Zandi believes that “it’s clear that even when the economy gets back on its feet, we’re going to have very high unemployment in many parts of the country for a long time to come.

“One reason is that the people out of work don’t have the skills and education necessary to be employed in the jobs of the future.”

The US economy saw its first growth in over a year, rising to an annual rate of 3.5% between July and September.

Experts believe that a major spending plan by the US government which featured a scrappage scheme to encourage the car sales market has been the main cause of the upturn.

Some economists believe that there could be more setbacks lurking ahead, despite the official statistics showing that the recession is over.

A spokesman at the White House announced that recent economic progression was “a welcome milestone” but it would take more time for a full recovery to be recognised.

The US economy had risen 0.9% in relation to the previous three months, whereas the UK economy remained in recession, unexpectedly dropping 0.4%.

Hugh Pym, the chief economics correspondent for the BBC, revealed that the growth rate of 3.5% was greater than the 3.3% predicted by most experts.

He continued:”The sheer scale of the stimulus in the US has made a big difference, it was much bigger in percentage terms than that in the UK.”

“That the US, the powerhouse of the world economy is growing once again, is good news for the global economy has a whole.”

The last time the US economy grew was in the second quarter of 2008, by an annual rate of 2,4%.

The National Bureau of Economic Research will reveal the full extent of the US economic climb from recession when it analyses all the factors.

Some factors were significantly responsible for helping US economy during the third quarter, according to the Commerce Department.

The spending on durable manufactured products rocketed up at an annual rate of 22.3% which was the highest quarterly figure since 2001 and was spearheaded by the ‘Cash for Clunkers’ scheme helping new car sales.

Consumer spending increased on housing products by 23.4%, the greatest quarterly surge in 23 years, and came as a result of an improving housing market.

The big increase is considered by many to be due to the government’s $8,000 tax credit provided to first-time house buyers.

Government spending increased by 7.9% as stimulus spending spread and exports saw their biggest rise since 1996, rising by 21.4%.

Brian Bethune, an economist for HIS Global Insight stated that “it’s good to have the economy growing again.”

“But we don’t think that rate of growth is sustainable because it is distorted by all the government stimulus.”

“The challenge here is to get organic growth - growth that isn’t helped by fiscal steroids.”

However, unemployment is at a rate of 9.8% and a sharp fall came in September in the car sales industry as a result of the popular car scrappage scheme coming to an end in August.

Dean Baker, co-director of the Centre of Economic Policy Research believes that “you can say that the recession is over, but it sure won’t feel like that.”

“There is a lot of downward momentum that isn’t going to go.”

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.

The Council of Mortgage Lenders (CML) has revealed that the number of properties repossessed by mortgage lenders rose by 12% in the third quarter of the year.

It has also revealed that the number of borrowers in arrears went up by 8%, and the number of repossession orders made by courts in England and Wales rose by 3% compared to the second quarter of the year.

The figures suggest that things are set to get worse, with more people losing their homes as the country falls into a recession.

Margaret Beckett, Housing Minister, has said that “the Government is taking action to protest the most vulnerable families from repossession… [This includes] a new court protocol to make sure lenders are exploring all avenues before making a claim in the courts, a £200 million mortgage rescue scheme, more free legal representation in county courts, and more free debt advice.”

With interest rates falling, and unemployment rates rising, it is not surprising that so many people are struggling to make their mortgage repayments.

Director General for the CML, Michael Coogan has said that the company still predicts 45,000 repossessions this year, but that trying to predict numbers for 2009 was “premature”.

He also said that it was generally not in the lenders’ interest to repossess properties, and that the Chancellor’s Pre-Budget Report needs to address.
“Conditions in the wider economy suggest a worsening picture for mortgage lenders, however carefully lenders handle their treatment of borrowers in difficulty.”

The CML’s figures also suggest that the buy-to-let market has also become tougher in recent months as arrears for the landlords of such properties are now generally higher than mortgage borrowers.

The CML have explained that: “Reasons include falling rents and an over-supply of rental property in some areas, resulting in some landlords being unable to let their property or achieve high enough rents to support their borrowing commitments…Fraud is also likely to have been a contributory factor.”

Figures also showed that in the third quarter of the year, the number of people behind on their BTL loans were behind by 1.58%, compared to 1.44% of mortgages.

The number of landlords who saw their properties repossessed in the third quarter of the year however, was exactly the same as in the first two quarters.

The CML has warned that this lower BTL repossessions rate is “unlikely to be maintained”.

Also released today were the Ministry of Justice (MoJ) figures, which showed the situation earlier in the repossession process when lenders first go to court for permission to take back a mortgaged property.

Figures for England and Wales shoe repossession claims in the first stage of being processed were 1% lower than in the previous quarter, but overall, 9% higher than the third quarter of last year.

The number of court orders being made by county court judges was up 3% over the quarter, putting them 24% higher than this time last year. However, an agreement is often reached between the lender and the borrower, so many of these cases will not end in repossession.

Chief economist for the Royal Institution of Chartered Surveyors (Rics), Simon Rubinsohn, has said that he doubts that the number of repossessions has peaked just yet. He believes that claims will rise as people lose their jobs and buy-to-let landlords face rising mortgage costs and falling rents.

Even though the number of repossessions is rising, it still does not yet compare to the last property slump in the early 1990’s.

Chief executive of Shelter, Adam Sampson has said that: “lenders may claim they are using repossessions as a last resort, but they must not pat themselves on the back too soon as both repossessions and arrears are still continuing to rise.”

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.

As part of the package of measures designed to revive the flagging housing market, Stamp Duty is to be axed on properties costing less than £175,000.  The level at which the 1 percent purchase tax has to be paid is to be increased form £125,000, from Wednesday morning. The move applies to residential property, would save someone buying a £174,000 property £1,740.

Other measures in the package include “free” loans of up to 30 percent for first time buyers in England. If a household’s income is les than £60,000 it will be offered loans free of charge for five years on new, co-funded, properties.

Although house prices are reportedly falling at their fastest rate since the early 1990s, rising fuel costs and the global credit crunch are dampening consumer confidence.

The Communities secretary Hazel Blears is set to announce a series of proposals on Tuesday aimed at rejuvenating the housing market. She is one of several cabinet ministers putting forward plans seen as the beginning of Mr Browns “recovery plan”.

The loans system is called HomeBuy Direct, and is to be run together with “large-scale” property firms. Once the five-year “free” period is over, homebuyers will be asked to pay a fee, although what exactly the fee will be remains a mystery.

In a statement, the Department for Communities and Local Government (DCLG) said: “Not only will this help first-time buyers, but it will also support the industry by identifying buyers for their new homes.

“This will help the house building industry weather difficult conditions, so that, when the market recovers, they are ready to expand and get back on with building the new homes the country needs for the long term.”

The government has said that for existing homeowners who can no longer afford mortgage payments, councils and social housing landlords can pay off the debt and instead charge tenants rent “at a level they can afford”.

The DCLG also promises to “bring forward funding for social housing from existing budgets, delivering more social homes sooner”.

On Monday, the prime minister Gordon Brown said the UK faced “unique circumstances”, including oil prices trebling and the global credit crunch.

But Mr Brown said the government was “resilient in… dealing with these problems”.

He earlier denied a rift with Chancellor Alistair Darling, who had said the country was facing its worst economic crisis in 60 years.

For the Conservatives, shadow chancellor George Osborne said: “We will look at the details of these measures and we will support those that will work.

“But let’s be clear, they are not going to help the vast majority of families facing a rising cost of living and falling house prices.

“Nor do they amount to the first instalment of the economic recovery plan we were promised.

“I suspect that what we will see in the coming weeks is a desperate and short-term survival plan for the prime minister rather that the long-term economic plan the country needs.”

Liberal Democrat leader Nick Clegg said: “This looks like a hotchpotch of measures thrown together to save Gordon Brown’s political skin.

“The social housing stock could be increased far more easily by allowing local authorities to buy up unsold properties and use them for new social housing.

“Yet again the government is desperately scrabbling around for a way to fix problems of its own making.”

Gordon Brown is to unveil a multi-million pound package of measures that are aimed at reviving the housing market today.

More funds are to be made available to local authorities to help first-time buyers get a foot on the property ladder. Councils will buy repossessed and unsold properties, and offer financial assistance to borrowers in return for a stake in their homes or outright ownership.

The Treasury is also considering a postponement on stamp duty – the tax charged on the purchase of a property - for lower value homes, as well as a tax-free savings account for first-time buyers.

The prime minister is trying to recover political ground after months of declining support in opinion polls and chancellor Alistair Darling’s warning last weekend that economic conditions were “arguably the worst they’ve been in 60 years” and voters were “pissed off” with Labour.

On Sunday, the justice secretary, Jack Straw, attempted top play down Mr Darling’s comments, defending both Brown and Darling’s handling of the economy. “We’ve had a very good period of economic management and economic success which has, for sure, provided us with a really serious platform to weather these storms,” Mr Straw told the BBC.

The package will be followed later this week, or early next with measures aimed at helping lower-income households facing hardships as a result of rising fuel bills. Further measures aimed at reviving the wholesale mortgage market are being delayed by the Treasury until this autumn’s pre-budget report, pending agreement between ministers and the Bank of England.

According to the Treasury, the package could amount to around £1bn, bringing forward allocations already pledged and making available additional finance in new funds.

As Mr Darlings comments reverberate around Westminster, the Conservative government claimed the government was divided, and many within Labour believe Darlings head will roll when Gordon brown reshuffles his cabinet after his party’s conference at the end of the month.

“The problem with Alistair [Darling] is that he is disastrous in presentational terms and gives the impression of not being in control of events or responding to them quickly enough,” one Labour backbencher said.

According to a survey, house prices in England and Wales have continued their decline last month and are now lower than they were a year ago. Prices fell 0.9 percent between May and June, after the steep 2.5 percent drop of the previous month, Nationwide said today. Its index shows prices are now 6.3 percent lower than a year ago, after eight straight months of decline.

The survey’s release follows data showing mortgage approval numbers – regarded as one of the best guides to the direction of prices – dropped in May to little more than a third of last year’s level.

Fionnuala Earley, Nationwide’s chief economist said, “With house purchase transactions so far below their long term trend it seems unlikely that there will be any rapid turnaround in housing market fortunes in the coming months.”

She noted that volatile markets had led to “more frequent mortgage re-pricing”, exacerbating the previous tightening of credit conditions.

Ms Early said – citing a survey by the Council of Mortgage Lenders – that the fall in transaction volumes has been sharpest among existing homeowners moving house. The proportion of first time buyers ha not changed a great deal, and buy-to-let investors account for a bigger share than average of new mortgage approvals.

Nationwide also published quarterly data showing that over the last three month, prices were lower than a year ago in all regions of England and Wales.

With the south no longer clearly outperforming, the gap between the rate of price change in the north and south of England has narrowed. Although London remains the most expensive area, the capital suffered the first year on year a price fall since 1995.

The only part of the UK where prices remain higher than a year ago – although they have fallen quarter on quarter – is Scotland. Nationwide attributes this to pockets of oil wealth around Aberdeen, and the fact that housing had remained more affordable than in most of the country.

Nationwide say the average UK house price was £172,415 in May, compared with £184,000 in June 2007.

According to research by Moody’s, the credit ratings agency, the UK’s banks and building societies could absorb a 20 percent fall in house prices in a year without further denting their capital reserves.

The study, set to be published on Friday, comes as shares in Britain’s largest lenders continue to slide, raising fresh concerns that the investment banks that have underwritten the rights issues for Royal Bank of Scotland and Bradford and Bingley would be left holding a substantial proportion of the new shares.

Now at their lowest level for a decade, RBS’ shares have slipped 2.6 percent to 231.75p. Meanwhile, B&B’s shares dropped almost 7 percent to close at 90.5p, which is just 8.5p above the 82p underwriting price for its £300m rights issue.

The weak share prices reflect growing concerns about the impact of the slowing UK economy and falling house prices on banks’ profits. Investors are starting to believe we could see a repeat of the housing slump in the early 1990s.

The Moody’s research suggests, however, that even if house prices were to fall by a fifth, most banks will have sufficient capitol reserves. A 50 percent fall in house prices however would leave many banks needing fresh capital.

Elisabeth Rudman, a Moody’s senior credit officer said, “We found from our stress tests that the mortgage lenders do have a considerable ability to absorb a substantial downturn in that market.”

As reported late last week, RBS, HBOS and B&B have launched rights issues to rebuild their balance sheets, although these capital raisings have mainly been designed to boost reserves after the banks suffered losses on investments linked to the US mortgage market.

Moody’s said it couldn’t rule out further writedowns at the UK banks until house prices had stabilised.

Falling share prices of RBS and B&B have confounded bankers, who priced the rights issues at a heavy discount in order to increase their chances of success.

The sell-off also hit banks that have resisted the pressure to raise capital. Barclays shares, on Thursday, fell 9.75p to close at a five-year low of 377.5p.

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.