Some Business News as at 2007 11 29
Is this the winter of Uncle Sam's
discontent?
Right now, or so it would appear, we are entering the winter of discontent in the US. The latest news out yesterday was grim indeed.
The bard, after opening his play Richard III with his famous saying on discontent, went on to describe the central character as, "Deformed, unfinished, sent before his time into this breathing world, scarce half made up." And yesterday, the latest data certainly painted an image of a most unpleasant face for Uncle Sam's economy. Actually, the bad news came in two forms. US consumer confidence and house prices.
The US Consumer Confidence Index fell to earth in November, dropping from a worrying 95.2, to a disastrous 87.3. The last time it was lower than that was in March 2004, but that was in the aftermath of Hurricane Katrina. Bear this in mind. The US Conference Board, which releases these figures, has this habit of changing the data downwards when it announces the next batch. For example, last month it said the Consumer Confidence Index for October was 99.6, but now has October coming in at four points less than that. So, if it remains true to form, then next month we will discover that actually the index for November is much lower than we are currently being told. If that happens we will have to rewind the clock back an awfully long time to discover the last occasion it was so low.
Yesterday also saw the release of the latest Case-Shiller house price index from Standard and Poor's. And boy, is it down.
The index for measuring house prices across the US fell by 0.9 per cent in just the one month period from September to October. As for peak to trough, well, the index peaked in July 2006, and is now 10.9 per cent down from that. Not so long ago, pundits were predicting a mere slowdown for US house prices, with few expecting to see falls. So much for those predictions. In fact, the US has seen bigger monthly drops before, but only just. We got our slide rules out and had a gander at the Standard and Poor's data going back all the way to February 1987, and during that period, the monthly rate fall was higher than that on just three occasions, November 1990, and January and February 1991. But the peak to trough fall during that period was not so bad, with the Case-Shiller index falling 5.6 per cent from October 1989 to April 1991.
But if that sounds pretty bad, pity those poor old home owners living in the five worst afflicted areas. In Tampa Florida, the index is now down by over 11 per cent from peak to trough.
Furthermore, of the 20 regions the Case-Shiller index tracks, not one recorded a rise in the index over last month. With mounting evidence to suggest that the credit crunch is far from over, it would take a brave soul to predict an imminent improvement in these figures. More falls are far more likely.
The National Association of Realtors will be publishing its figures on US median and mean house prices this week. Last month it revealed a 7.64 per cent drop from peak to trough.
Germany sees bright landscape, but
cloudy
As you may know, while the US totters and the UK starts watching its footing with trepidation, Germany seems to be returning as a major player on the world stage. It has now pretty much paid off the cost of re-unification, and it has quite impressively managed to maintain its share of international trade, at a time when China has been muscling in on other countries' turf. The thing about Germany is that its recovery has been built on production. On producing and exporting its way to growth; the Germanic consumer has not gone out and spent like his Anglo Saxon cousins.
For example, yesterday saw the release of the latest survey on German business confidence, and the headline index is up. That was against expectations, too. Okay, there are signs of an easing up. Business expectations, for example, are down to the lowest level since August 2005 but, even so, considering the doom and gloom flooding out of the US, it's really pretty good. But, there is a cloud on the horizon. The cloud is inflation: it shot up in November, to 3.3 per cent, the highest level since the German CPI figures were first introduced in 1997. Okay, there are no prizes for guessing why the index went upwards. Energy inflation is taking its toll. The trouble is, at the beginning of this year, the German government pushed VAT upwards too, so that hasn't helped either.
Germans don't like inflation. And while there are reasons to think that some of the recent rises are one-offs, such a development will be received with dread by many in Frankfurt.
Bear in mind that the French premier, nearly-headless Nick Sarkozy, has been suggesting that the European Central Bank (ECB) has been too pre-occupied with inflation, and has been too willing to up interest rates, then you see a real division emerging in the Eurozone. Before the formation of the euro, an independent central bank was considered almost sacrosanct in Germany. But recently, Mr Sarkozy talked about removing the independence of the ECB unless it becomes more open and accountable.
Or put it another way, unless the ECB objectively analyses the data, debates the issues of the day, and then, after a free and frank discussion amongst its members, independently agrees with Mr Sarkozy, then maybe it should lose its independence.
Wage revolution hits Bangalore, but
misses UK
It's good news for workers of India, while the Vietnamese and Chinese have reason to celebrate. Closer to home, Bulgarians and Turks should be laughing, but it's not so good for the Brits, or indeed Germans and French.
Earlier this week, human resources group Mercer released its projections for wage increases next year. India should really be celebrating, because Mercer is predicting wage increases of 14.1 per cent in the economy of the sub-continent next year. Inflation in India is expected to run at 4.3 per cent, so even after allowing for inflation, wages will be rising at an impressive 9.8 per cent.
Meanwhile, Mercer is forecasting wage inflation of just 3.1 per cent in the UK, but after adjusting for an expected CPI rate of inflation of 2 per cent, your average Brit will be just 1 per cent better off.
Well, actually it will be even worse than that, because this CPI measure for inflation is really not that good. The Retail Price Index gives a much better idea of what is really happening, and last month this was rising at 4.2 per cent, so actually, it would appear that your average Brit will be worse off next year.
Global salaries are expected to rise by an average of 6 percent in 2008. 1.9 per cent above inflation, says Mercer. Countries that expected to see real wage rises in excess of 3 per cent include, India, Vietnam (5.6 per cent), Bulgaria (4.9 per cent), Turkey (4.5 per cent), China (4.3 per cent), South Korea (3.9 per cent) and Romania (3.3 per cent).
The US is expected to see wage rises after inflation of 1.9 per cent which is actually pretty good, so maybe the downward pressure created by subprime woes could be cancelled out by the upward effect of positive wage rises.
As for the UK, perhaps a more telling measure is disposable income. According to a recent report from Ernst and Young, our discretionary income is at its lowest level in five years. It says the average household now has £837.53 to spend each month after total fixed monthly outgoings, that's after things like mortgages, council tax, petrol and utility bills, compared with £898.54 in 2003/04.
It seems that globalisation is having the effect of reducing the gap between workers in the developing world and workers in the developed world. Actually, the net effect is fairer, but it is worth bearing in mind that while the UK has benefited from globalisation, and while business has done well, your average worker in the UK is actually worse off.
In this globalised world, capital is enjoying better rewards, labour lower rewards. Only by ensuring the public benefit from greater corporate profitability, perhaps through holding stakes in business via their pensions, we can ensure that the greater wealth globalisation brings truly trickles to the average man and woman in the street.
"The focus over the last few months has very much been on subprime borrowers, but they are only the tip of the iceberg," said Mintel yesterday. And with those words Mintel put the Fear Of God up the UK property market.
Mintel reckons 9 per cent of mortgage holders in the UK are subprime, but that another 24 per cent were non-standard with irregular incomes. And that's a problem, says Mintel, because when these mortgageholders come to move, and need to get a new mortgage, or if they want to re-mortgage their property, they are going to find it a whole lot harder and more expensive than they were expecting. "In today's more-conservative lending climate, the unconventional financial situation of these homeowners means that they will now face higher repayments and increased lenders' fees when remortgaging or moving house," said Mintel.
It does seem to us that many economists have underestimated how serious the current credit crunch is. If you remove from people the ability to borrow in order to repay borrowings, then all of a sudden you may well find a rapid rise in possessions, which in turn could lead to a rush of cut-price properties coming on the market.
2008 is likely to see this partially reflected in house prices, but given the time lags entailed in property possessions, 2009 may well be the year when things hit bottom.
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