Jump to content
House Price Crash Forum
Sign in to follow this  
zzg113

John Butler Article On Ft.com

Recommended Posts

http://news.ft.com/cms/s/b1a35d44-0519-11d...000e2511c8.html

What is Britain's problem, according to Butler, and how should it be solved?

With inflation risks diminishing and downside risks to growth crystallising, it was perhaps no big surprise that the Bank of England’s monetary policy committee cut UK interest rates to 4.5 per cent yesterday. Businesses and households understandably welcomed the news. The widespread perception is that the Bank is fine­tuning the economy rather than opening the floodgates to more aggressive cuts. Once again, the Bank acted pre-emptively – a tactic that in the past, has succeeded in stabilising growth.

But is this time different? An interest rate peak of just 4.75 per cent continues the pattern in which successive rate cycles have peaked at lower and lower levels. Surprise or no surprise, this latest move is still untypical of the Bank’s past moves. That is because it was not associated with a fall in inflation expectations; nor was it in response to a global shock, as in past years. This cut was quite simply a direct response to worsening domestic news.

The question is whether a modest interest rate cut will resolve the problems facing the economy. If we listen beyond the noise often created by monthly movements in economic data, the real problem with the UK economy is that companies are saving too much – which is detracting from current growth, and households are saving too little – which threatens to detract from future growth. A rate-cut in isolation is unlikely to resolve that issue.

Will lower interest rates bolster corporate investment activity? The level of interest rates is not a major constraint on corporate activity, where the problems seem more deep-rooted. Companies are cash rich, yet the proportion of nominal investment in gross domestic product is at a 40-year low. The legacy of the late 1990s is that companies associate higher risk and lower priority with investment spending. The previous investment surge left behind excess capital and disappointing returns, therefore shifting corporate focus towards rewarding shareholders and reducing pension shortfalls rather than seizing new investment opportunities. For instance, employers’ contributions to funded occupational pension schemes have increased substantially in recent years. According to the National Statistics Office, employers’ annual contributions to occupational pensions have increased by £20bn since 2001. In the same period, the level of nominal business investment has actually fallen by £1bn. Companies seemingly have other priorities before they commit to future capital expenditure.

Eventually, investment spending will recover. A stronger international environment and lower sterling would be helpful but the immediate outlook at least is not encouraging. Despite good equity-market performance, estimates of total corporate profits suggest the recovery has stalled and that has lowered confidence about future profitability and reduced investment intentions.

True, lower interest rates will reduce the pressure on households; but interest rates are not the sole reason that consumer spending has slowed, particularly as only half the rate rises were actually passed onto the household sector. The real explanation is that the finance available for consumer spending has dried up. A slowdown in the housing market and reduction in credit have not been replaced by higher personal income growth. Expectations about future house price gains have been dramatically reduced and that in turn has made households more reluctant to borrow against anticipated house price increases. Households are already saving too little. Rising unemployment, a higher tax burden and a weaker housing market should prevent a consumer recovery.

So the likelihood is that economic activity will disappoint further, as a sustained slowdown in private and public consumption is only partially offset by a modest export, industrial or investment recovery. The difficulty ahead is that the UK does not have the policy discretion it has had in recent years. Fiscal policy is set to tighten. Sterling should fall, but weak European demand will mean this is unlikely to generate the export recovery enjoyed in the early 1990s. The pressure will once again be on interest rates but that may not provide the answer.

Interest rates in recent years have been very effective at encouraging households to respond. It is less clear, however, whether they will generate a similar response in an environment in which households are already heavily indebted and unemployment is rising. Like the corporate sector in recent years, interest rates may be used to help rebuild balance sheets rather than motivate spending. Finally, we may see that interest rates do not cure all ills.

The writer is UK economist at HSBC

Share this post


Link to post
Share on other sites

Once again, the Bank acted pre-emptively – a tactic that in the past, has succeeded in stabilising growth.

It also created the biggest bubble in personal debt since the formation of the Bank fo England and it pre-emptively did ****** all about that one and buried its head in the sand.

That should be pinned to the donkey too.

Edited by OnlyMe

Share this post


Link to post
Share on other sites
Companies are cash rich, yet the proportion of nominal investment in gross domestic product is at a 40-year low.
the real problem with the UK economy is that companies are saving too much – which is detracting from current growth, and households are saving too little – which threatens to detract from future growth.

Isn't this all a bit disturbing when companies whack their money into the stock market because they can't get a return on their normal business activity.

Share this post


Link to post
Share on other sites
Isn't this all a bit disturbing when companies whack their money into the stock market because they can't get a return on their normal business activity.

Quite!

But if it helps my endowments to recover and grow, all well and good. I have been wondering who on earth has been buying into the Stock Market!

Share this post


Link to post
Share on other sites
With inflation risks diminishing.......

I'm surprised no-one's picked up on this, given that many posters here believe inflation is a huge problem and interest rates need to rise to offset it.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 302 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.