During the Christmas break like many people I tried to put the credit crunch and recession to the back of my mind. Rather like the soldiers in the First World War who ceased hostilities on Christmas day in 1914 to play football with one another and momentarily forget about the horrors they were experiencing. Whilst I am in no way suggesting our experiences bear much comparison, most of us will bury our head if the opportunity presents itself. Indeed if you were in the same camp as my wife and Gordon Brown, then you were helping the world's economy by supporting the theory that we should spend our way out of trouble during the festive period! (What am I going to do with that unwanted back massager?)
Before focusing on the wider political response to the economic crisis, at the risk of saying I told you so; I thought it would be interesting to test the accuracy of my forecasts for the economy, as predicted back in November. Here goes:
Al's Forecast |
The Reality |
- Pressure on the MOD to reduce spending
- Deep recession
- No reduction in manning in the Armed Forces
- Government will not allow anyone to lose savings because of bank/building societies
- Bigger deposits required for the best mortgage deals
- Income multipliers tightened
- House prices to fall 25% by 2010
- Second hand car values to plummet
- Increases in insurance premiums
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- New RN aircraft carriers delayed by two years
- Just how deep is deep?
- None forecast
- Correct
- Deals now require circa 40% deposit eg HSBC current tracker mortgage
- Increasingly so
- Approximately 16% drop in 2009 – so on track there
- Collapse is probably the correct word
- Still to come
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Trust me I am not going to get to smug; I'd really prefer to have been proved wrong.
So where do we go from here? Back to my wife's strategy (sorry darling), and a number of Governments around the world have implemented policies to increase public spending. But, just as with individual's borrowings, which is how most of this spending will be funded, there comes a period of reckoning when it has to be paid back. Even so, I suspect most of us would really prefer to keep our jobs and pay slightly higher taxes in future years, if that's what it takes.
A couple of significant developments have taken place recently, and the first has a particular impact on those serving in Cyprus - the sterling/euro exchange rate. Two months ago the relationship was 1.24 euros to the pound. Over the past few days we have seen the currencies reach parity – this represents a fall in excess of 20% in two months. Similar falls have been experienced against the dollar and other international currencies. Whilst this has both negative and positive implications for the UK economy, for those paid in sterling and living in Cyprus in the main it is bad news. Indeed I would argue that there are a number of negative implications for the island of Cyprus . Holidays to any country in the euro zone at current rates will lose their attraction, and so visitor numbers will drop, but this could be an upside if your least favourite relatives were due to visit. But the gloom is compounded by the fact that Cypriot property prices now look very hot against much of Europe and the United Kingdom .
The second development has been the larger than anticipated reductions in interest rates. The Bank of England today reduced the base rate to 1.5%, the lowest rate since it was formed in the 17 th century. Other countries are also following a similar path. Whilst this is good news for mortgage borrowers on the whole, not all are benefiting, as many tracker rates have a collar (minimum rate) of about 3%. Those on a fixed rate could now find it cheaper to pay the penalty for breaking out of the deal and switching to a lower interest rate (subject to having sufficient equity in their property) - ultimately some people may be better off doing this. All the while, personal loan and credit card rates are rising, as lenders become more conservative in the unsecured area and look to regain lost profits.
Of course those who really suffer are those who rely on their savings for income, which includes many expat retirees in Cyprus . However, reducing inflation and the threat of deflation may encourage many to spend (Darling's plan). If indeed we were to suffer deflation then of course the value of savings increases, but economists always warn of the dangers of deflation, as it discourages people from spending as they wait for items to become cheaper. In the end the spiral continues. If we are not careful we could end up with economies that, even if they recover from negative growth, stagnate, as Japan has done for the last decade.
So until the next instalment from the trenches here are a few thoughts to be going on with: -
• Stop wasteful spending, not spending
• Understand where and how you are spending your money
• Consider investing in the equity market if you can take a long term view
• Spread investment across economies
• Only keep £50,000 cash with any one UK institution (lucky you)
and two less serious ones: -
• Stop talking about the recession - we are all making it worse!
• Don't moan when your partner's been shopping!
Al Voice
MD Forces Financial
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