Tuesday 14th October 2008
by Bob Bardsley
Know Your Money Editor
It might seem like only yesterday that the sub-prime lending crisis appeared confined to the US, but more than a year later the planet's financial markets are continuing to show evidence of shockwaves, with banks being bought out and headline statistics such as inflation spiralling ever further from the Bank of England's targets. In an ever-changing economic climate, what are the latest developments and what could they mean for UK consumers?
Inflation
One of the most dominant statistics in headlines over the past year or so has arguably been inflation, which continues to stand above the three per cent upper target limit. This week the Office for National Statistics (ONS) has published the latest data on the consumer price index (CPI), showing inflation now measures in at 5.2 per cent. Meanwhile, the organisation also notes that the August CPI inflation figure of 4.7 per cent was half a percentage point above that recorded across Europe as a whole.
So where are Britons feeling the pricing pinch? In previous months food has been identified as one of the main areas, along with fuel. The latter continues to exhibit substantial price growth, with costs up by an average of 30.3 per cent annually on electricity and 49.9 per cent on gas. On food, though, the picture is a little brighter, as the ONS reveals that the rate of inflation is actually slowing. From August's year-on-year growth of 14.5 per cent, food prices were recorded as having risen by 12.7 per cent in the 12 months to September.
Borrowing
Consumer lending is the area from which the credit crunch gets its name - and the latest figures from the Council of Mortgage Lenders could be seen as evidence that the tightening of lending criteria is beginning to emerge in terms of the total amount and number of loans obtained by UK residents. August 2008 now holds the record as the lowest lending month on record - which makes it the least active month for borrowing since January 2002.
In all, the amount lent to consumers for the purpose of purchasing property dropped by almost two-thirds (63 per cent) year-on-year to stand at around £6 billion. First-time buyers (FTBs), who account for just under a third of the amount lent as a whole, are borrowing less, placing larger deposits and obtaining a smaller multiple of their income. The industry body explains that the average FTB mortgage is now for £106,754 - lower than any month since May 2006 - covering 84 per cent of the property purchase price. This is a six per cent drop over the past 12 months, while income multiples have gone from 3.39 to 3.18 times the typical FTB salary.
UK banking prospects
Monetary policy committee (MPC) member Andrew Sentance this week gave his predictions for the future of economic stability in the UK. He argued that the technical definition of a recession - two periods of negative economic growth - does not allow for an estimation of how quickly conditions will recover. As such, he claimed that the recent more severe shocks to global economies are likely to result in a more prolonged downturn in the UK than was previously the case.
Mr Sentance identified three major reasons why the economy - in the UK, at least - might be expected to begin to recover by the middle of 2009. The first is that, by then, recent effects should have filtered through and wage growth should resume, while food and fuel will be more affordable in real terms. Second, he predicted that action taken by central banks will take effect by then. Finally, he notes that the downward shift in world markets is likely to impact on future MPC decisions when setting the base rate of interest, which in turn is to have an effect on the economy's recovery.
Central banks overseas
For those who believe the credit crunch worldwide originated in the sub-prime lending crisis in the US, the actions of the nation's Federal Reserve Bank might be of interest. Most recently, the Fed has announced it is making a limitless amount of funding in US dollars available to central banks across Europe - including the Bank of England - to guarantee sufficient funds to ensure liquidity on the continent. Such an initiative has been scheduled to last until April 30th 2009.
In the short term, though, the Fed recently asserted that some easing of credit conditions would be timely. The central bank explained that more lenient lending criteria could be likely in light of the reduced risks to upward pricing pressure put in place by the credit crunch.
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