News Review: Economics


Tough economic times in store for 2011 by


Fionnuala Earley,


UK consumer economist, Royal Bank of Scotland


news this month has not been jolly. While the chancellor of the exchequer may be sleeping more soundly on the news that the first estimate of Q1 gross domestic Product was positive, the performance isn’t anything to write home about. We may have dodged a double dip but the estimate of 0.5% growth in Q1 2011 simply wipes out the contraction in the previous quarter. in effect, we are in the same place we were six months ago. But there was some


good news. the number of unemployed fell by 17,000 in the three months to February (although the numbers claiming


Jobseeker’s


allowance increased by 700). total job growth picked up to a two-year high of 143,000 in the three months to February, with 140,000 of these being full- time. on top of this, the rise in private sector jobs


easily outpaced the fall in public sector jobs in 2010. this is a key part of the chancellor’s recovery plan and needs to continue once the austerity measures bite; but this is a good start and something to be happy about.


Rates the monetary Policy committee’s decision to leave rates at 0.5% for the 27th consecutive month was no surprise given the stagnation in gdP growth. But it will have been welcomed by households, especially those who have the most mortgage debt. according to the Bank of england’s annual survey on the financial position of British households, those earning around £27-45,000 have the highest mortgage debt as a proportion of disposable income at about 15%. rises in interest rates will


clearly hit this group hard. if rates increased to 3% by 2013, another 3% of this group’s disposable income would be eaten up by mortgage payments, even after taking into account expected


Please mind the gap


The Governor gave nothing away on the timing of interest rate changes but he did give us another variable to keep our eyes on: the gap between the bank rate and the cost of funds faced by commercial banks. As the chart shows that gap has been widening since mid-2009 because of ongoing uncertainty. If this gap shrinks it will be a sure signal that policy rates will rise. If they did not there would be an effective loosening of monetary policy. So in order ever to keep the policy stance neutral, if the gap narrows, rates will have to increase.


20 mortgage introducer JUNE 2011


increases in wages in this period. But the situation is also bad for those earning over £40,000 with children. From next year, this group


will no longer receive child benefit and child tax credits which, for a family with two children, is worth £2,300 per year. Losing these benefits shaves another 7% off their disposable income. Launching the may


inflation report, mervyn King certainly gave us no reason to think things would become any more comfortable in the next year or so. the Bank revised its inflation forecast up to 3% for mid-2012, compared with the 2% estimate in February. But the governor warned it could increase to 5% in the meantime, boosted by the increase in Vat, utility and import prices and some rebuilding of companies’ margins. a whopping 15% estimate


of the increase in gas prices will be another blow to households. the projection for gdP growth was edged down a little from 2% to 1.75% in 2011 but the overall picture


hasn’t changed that much. the uK economy is still


expected to continue to recover but to do so a little more slowly in the next year or so before returning to trend. But growth rates aren’t the only thing we should look at. the level of gdP, or the wealth of the economy, is still much lower than it was pre-crisis and with even the same rates of growth it will take us longer to get back to where we were than we thought. as mervyn King put it: “there is no doubt we are facing a difficult time ahead, with a slow adjustment to the financial crisis.”


More good news on arrears and


possessions


Source: Bank of England, Bloomberg, British Bankers Association, Markit Group Limited and Bank calculations


Mortgage arrears and possessions continued to fall in Q1 2011 compared with a year ago. Mortgage repossessions were down by 10% and the number of mortgages with arrears equivalent to 2.5% or more of the total balance fell by 2%. It seems that forbearance measures may have caused a discontinuity in the data though. While repossessions are down, the numbers of cases within the most serious arrears band (arrears of 10% or more of the total balance) increased. But with only a 1% increase this seems little to worry about. Indeed it is remarkable that mortgage arrears and possessions have remained so benign, given the huge squeeze on households this year.


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