Bleak Outlook For UK
The banks and lenders who have been affected by the credit crunch have inevitably turned it over to their customers to squeeze their credit. It is always the way: the end customer, be it an individual, household or business, ends up carrying the can for the foolish errors of bankers striving to make bigger, faster profits, and taking more risks to do so.
The Bank of England's latest Credit Conditions Survey highlights problems that began on high streets then ended up affecting the man in the street, with output and growth down and the outlook for jobs becoming more worrisome.
Given the contents of the report, it is hard to see anything other than further cuts in the Bank's interest rate, and that may start as early as the January review.
The trouble is that the banks are likely to use any interest rate cuts to their own advantage and will take longer - if at all - for benefits to filter through to customers. By no means all the banks have passed on the full interest rate cut from December in mortgage rates or loan rates.
The Bank says there has been a 'material reduction' in mortgage and loan advances from lenders, as they begin to shy away from risk.
There are two problems for the housing market. Firstly, lenders are less willing to lend, and secondly mortgage providers are concerned for a downturn in residential sales, so are holding back for that reason too.
The whole credit problem began in the United States, but the default rate on mortgages seems to have stabilised there, which is good news.
Another problem for the UK is the affect the lack of lending will have on businesses. Commercial property funds have shrunk in value, and some companies will be badly affected. Business investments are likely to fall.
Private equity is another business area likely to suffer from the cautious approach, as it relies on risk. In the US a number of private equity companies are looking for buyout, and in the UK some private equity lending by the big banks is starting to look rather suspect.
Problems for individuals and households will mean problems for retailers. If some shoppers seem to have ignored credit warnings over the festive period and into the sales, then it is unlikely that the trend will continue. Indeed some retailers have admitted good news was hard to come by. Next did achieve better profits for the year than expected, but says 2008 'will be tough'. Profits at DSG (owner of Currys and PC World) were short by £50m and shares tumbled. There is talk of a closure of nearly 30% of outlets, the group breaking up and a reduced dividend.
The pound's value has been hit since the reduction in interest rates, taking it from $2.05 to $1.97. Although this may hurt the UK tourist in the US, for those who sell to the US it is good news and may help to start to close the trade deficit.
Published on January 7, 2008
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