Property News, UK And World Economy Week 3 November 2011

Nov 16th, 2011No Comments

Property News and the UK and Overseas Economies

Eurozone Problems Continue

Governments in the Eurozone again looked over the precipice last week before taking two steps back. In Greece and Italy, the price of multilateral and market support, respectively, was the replacement of elected prime ministers by technocrats. Lucas Papademos and Mario Monti are regarded as the independent minds and steady hands to deal with the crisis. They are also seen as more likely than elected leaders to push through the austerity packages and economic reforms, which creditors and other governments have demanded. Alongside this, pressure is rising on the European Central Bank (ECB) to act as a lender of last resort, as other central banks do, although that contravenes the Treaty of Maastricht. All of this reflects the considerable costs that would flow from, either a disorderly default or, worse still, a country exiting the euro.

Euro In Intensive Care

The euro is still alive, but in intensive care. The Eurozone crisis is still dominating the economic headlines and until there is greater certainty about what will happen, it’s difficult to see where the global economy will go next. It’s clear that we are in a very dangerous phase, but things are still not moving quickly enough to quell fears about the collapse of the currency. This void is now causing worries about the stability of the banking system, which has even greater implications for the health of the global economy. EURIBOR spreads above policy rates, an indicator of the risk the market sees in the banking system, have risen sharply, reflecting increasing concerns about bank exposures to sovereign debt.

EC Warnings and Downgrade

The European Commission warned of recession and downgraded its GDP forecasts. The path out of the current crisis depends on growth, as much, if not more than austerity. But the prospects for this recovering rapidly are evaporating. The European Commission downgraded its forecast for 2012 GDP growth from 1.8% to just 0.5% and warned of the risks of a new recession. This doesn’t come as good news and simply highlights the difficult road ahead for Eurozone policymakers.

No Change To UK Monetary Policy

No change to UK monetary policy in November. The Monetary Policy Committee left UK monetary policy unchanged at its November meeting. The Inflation Report this week will shed more light on the Bank’s interpretation of the situation. But there is no doubt that the monetary authorities will be considering their policy options given the depleting arsenal of ammunition at their disposal, particularly in the face of the ongoing Eurozone crisis.

UK Trade Deficit Worsens Again

UK trade deficit worsened again in September. Rebalancing the UK economy towards exports is proving difficult to sustain. The UK’s trade balance widened by £1.2bn in September as growth in imports outstripped exports once again. After five months of deterioration the overall trade deficit reached £3.9bn – its highest since December 2010. The value of exports increased a little (0.2%m/m), but volumes fell (1.6%m/m). Meanwhile import volumes and value rose by 1.6%m/m and 3.8%m/m respectively, leaving the balance of trade in goods with a £9.8bn deficit.

Disappointing Industrial Production

UK industrial production disappointed in September. Overall industrial production dropped for the third consecutive month in September. Manufacturing production actually rose by 2%y/y, but this was outweighed by a 14.7%y/y drop in mining and quarrying. Factory output was encouraging. It rose for the first time in four months between August and September. But this is probably not strong enough to dispel concerns from the Purchasing Managers’ Index which shows the sector struggling amid poor domestic and external demand.

Property – UK Mortgages and Repossessions Remain Low

UK mortgage arrears fell in the third quarter while repossessions were stable. Even though UK economic conditions are worsening, mortgage arrears and repossessions have remained low. The number of repossessions per quarter has been virtually unchanged since the start of the year at 9,200. But arrears have improved. The number of mortgages with arrears of 2.5% or more of the total balance fell by 2%q/q and 8%y/y to 161,600, or 1.61% of all loans. But 17% of these have arrears of 10% or more. This proportion has increased steadily for the last eighteen months and highlights the growing vulnerability of households (and the housing market) to further income squeezes.

Japanese Economy Returns To Growth

The Japanese economy returns to growth. The Japanese economy grew by 1.5%q/q in the third quarter. This was a welcome relief after three quarters of contraction from supply disruptions due to the earthquake. But there is a sting in the tail too. Weaker global growth will affect Japan’s ability to export and so will the strength of the yen. The appreciation since September has concerned the Japanese Government and caused it to intervene in the market to stem its rise.