Fears Over Economic Recovery As Business Spending Slashed

(Guardian) – INVESTMENT BY UK BUSINESSES on new buildings and equipment plunged by a record amount over the past year, casting fresh doubts over the strength of Britain’s recovery from recession.

The Office for National Statistics reported this morning that business investment fell by 5.8% between October and December 2009 compared with the previous three months, worse than City analysts had predicted. The decline means that business investment was 24.1% lower at the end of 2009 than at the start – the worst annual decline since records began in 1967.

The fall was particularly acute in the manufacturing sector, where business investment plunged by 35.3% during 2009.

Howard Archer, economist at IHS Global Insight, said the data was “truly dire”, undermining hopes that UK GDP for the fourth quarter of 2009 could be upgraded tomorrow. Archer warned there was even a danger that the first estimate of 0.1% growth could even be downgraded, which would mean that the UK was still officially in recession.

“Furthermore, the sharp overall and ongoing decline in business investment could threatens to have significant long-term damaging repercussions for the economy’s potential output,” he added.

Business investment makes up more than 10% of overall UK GDP.

David Kern, chief economist at the British Chambers of Commerce (BCC), agreed that the preliminary business investment figures showed “alarming declines”. He said companies had been forced to conserve cash and not spend on new equipment, a decision which would make it harder for British industry to grow in the future.

“In the face of weak demand and acute financial pressures, businesses have had little choice but to slash investment and stocks in order to survive. But, such a situation cannot persist over the long-term without damaging consequences,” Kern warned.

“In order to promote investment, companies need continued support now – and the confidence that a credible plan is in place to mend our public finances as the recovery takes hold,” he added.

… (26/02/2010) – Spectre Of Double-Dip Recession Looms

Unemployment Claimant Count Rises Again

(Guardian) – GORDON BROWN’S EFFORTS to win the next general election received a blow today after official figures showed that the number of Britons claiming unemployment benefit rose unexpectedly in January to the highest level since Labour came to power.

The Office for National Statistics (ONS) said that the number of people claiming jobseeker’s allowance (JSA) rose by 23,500 in January, compared with a fall of 9,600 in December. This is the largest monthly rise in the claimant count since last July, and takes the total number of people receiving unemployment benefit to 1.64 million, the highest figure since April 1997.

Economists had expected the claimant count to fall by 10,000 in January as the UK economy struggled out of recession, after falling in November and December.

The ILO – the wider measure of unemployment – fell by 3,000 in the three months to December to 2.457 million. The jobless rate now stands at 7.8%.

Howard Archer, economist at IHS Global Insight, said the rise in the claimant count was a “reality check” that dashed any hopes that unemployment had peaked.

“The economy is just not strong enough at this stage to prevent further job losses and the fall in unemployment late in 2009 had masked the fact that full-time employment was still falling appreciably,” said Archer.

Ross Walker, an economist at RBS Financial Markets, agreed.

“The fact that the claimant count was falling in recent months was the huge surprise. The fact that we have got a rise is not particularly surprising. It seems to fit more with the underlying reality,” Walker said.

Yvette Cooper, the work and pensions secretary, said that the government’s actions have helped to keep the unemployment total almost half a million lower than the National Audit Office predicted last year.

“We always knew it would be difficult in the new year, and said that we expected unemployment to keep rising,” Cooper told the BBC.

Separately, the ONS said yesterday that underemployment has risen sharply during the recession, according to separate ONS figures.

About 2.8 million people were officially underemployed – defined as working fewer hours than they want to – between July and September 2009, which equates to nearly 10% of those in employment. The number went up by 700,000 from a year earlier. This is in addition to the 2.6 million out of a job.

Company Liquidations Up 14.6%

(Reuters) – THE INSOLVENCY SERVICE said company liquidations rose 14.6% on a year ago to 4,716 in the three months to September, after jumping nearly 40% in the second quarter.

Personal insolvencies rose 28.2% on a year ago to 35,242, the highest since records began in 1960, and analysts said worse was still to come.

‘Individual insolvencies will continue to rise for some time to come, despite current mounting signs that the economy will finally return to growth in the fourth quarter,’ said Howard Archer, economist at IHS Global Insight.

‘Unemployment has already risen substantially and is likely to climb significantly further, many people are suffering wage freezes or even cuts, debt levels have risen and credit conditions remain very tight.’

While the rate of company insolvencies slowed, the numbers remained high. Analysts predicted the easing would be temporary, with failures expected to rise further in 2010 as measures taken to stimulate the economy are gradually wound down.

Several famous companies have succumbed to Britain’s worst recession in decades and many others are fighting for survival. In October the owner of national off-licence chain Threshers, First Quench Retailing, filed for administration.

Last month restructuring specialist Begbies Traynor said 134,000 companies had shown signs of distress in the third quarter and that the worst is yet to come for corporate insolvencies.

Many smaller companies are still struggling to get hold of credit despite an unprecedented level of economic and banking support measures from the government and Bank of England.

‘The fall that we would normally expect to see in the number of business failures over the summer months simply hasn’t happened,’ said Carl Jackson, head of recovery firm Tenon Recovery.

‘Low interest rates, the temporary reduction in Value Added Tax, low inflation… have given firms some breathing room; but there is a feeling that these initiatives are simply delaying inevitable failure,’ he added. ‘Once withdrawn, there will be a flurry of failures.’

The Bank of England increased its asset purchase programme, meant to encourage Britain’s fragile banking sector to lend more, by £25 billion to £200 billion on Thursday; but slowed the pace at which it plans to buy gilts, fuelling the conviction the scheme was coming to an end.

Bank To Pump 25 Billion Pounds More Into Economy

(Reuters) – THE BANK OF ENGLAND EXPANDED its quantitative easing programme by £25 billion to £200 billion today, continuing its unprecedented scheme to revive Britain’s recession-hit economy.

Sterling shot up around a cent against the dollar and government bonds tumbled as many investors had expected a bigger expansion of the eight-month-old programme to buy assets, mostly UK government bonds, with newly-created money.

The BoE, which also left interest rates unchanged at a record low of 0.5% as expected, said the bond-buying would take another three months to complete and analysts said that would probably mark the end of the programme.

‘We suspect that this will be the final extension to the QE programme unless the economy suffers a major relapse in 2010,’ said Howard Archer, economist at IHS Global Insight.

While the BoE noted that numerous surveys had indicated that a pick-up in the economy was in sight, it still believed the prospect was for ‘a slow recovery in the level of economic activity.’

‘That will continue to bear down on inflation for some time to come, offset in the short run by the impact of the past depreciation of sterling,’ the BoE said in a statement.

Two-thirds of analysts polled by Reuters had predicted the central bank would expand its asset-buying scheme, but opinion had been split evenly on whether the increase would be £25 billion or £50 billion.

‘The Bank seems to be weaning the market off QE and we strongly suspect that, barring any further negative surprises to economic growth, this will be the last instalment of the programme,’ said George Buckley, economist at Deutsche Bank.

Britain’s economy remained mired in recession in the third quarter. The United States, Germany and France have already started growing again.

Consumer Debt Repayment At Record High Amid Fears Of Unemployment

(Reuters) – THE SCALE OF BRITONS’ BELT-TIGHTENING was laid bare today by data showing record consumer credit repayments in August and a five-year high in households’ savings ratio in the second quarter.

Official data confirmed the economy suffered its worst 12 months since modern records began in 1955, with output falling by 5.5% year-on-year in Q2.

Faced with a growing risk of unemployment, households reduced debt levels and increased savings — as well as finding it harder to access cheap loan deals.

But economists focussed on a more positive outlook ahead, with most expecting a hesitant return to GDP growth in the third quarter amid signs that the economy has passed its low-point.

The Confederation of British Industry’s September retail survey reported the first sales growth since April, which analysts had viewed as a blip caused by the late timing of Easter, while August mortgage lending was much better than expected and its highest since February.

‘The September CBI survey lifts hopes that retail sales are holding up pretty well after losing momentum in August. This is important to overall growth prospects given that consumer spending accounts for some 65% of GDP,’ said Howard Archer, economist at IHS Global Insight.

The positive news from the CBI came despite data from the Bank of England which showed consumers repaid a record net £309 million of unsecured debt — mostly credit card balances — trumping the £259 million record set in July.

This chimed with figures from the Office for National Statistics which showed the household savings rate rose to 5.6% in Q2 from 3.9% in the first three months of the year, its highest since late 2003 and further evidence that the credit boom earlier in the decade is now long gone.

Nonetheless, Bank figures showed growing signs of a turnaround in mortgage finance — a precondition for sustaining tentative rises in house prices, which boost consumer confidence and some types of retail spending.

The number of mortgage approvals slipped fractionally in August to 52,317 but remained close to July’s upwardly-revised 52,404, the highest since April 2008. Net mortgage lending rose by £1.009 billion, the biggest rise since February.

But evidence the Bank of England’s £175 billion quantitative easing policy (printing money to buy assets and boost the economy) was increasing the broad money supply as intended, remained elusive.

The Bank’s preferred measure rose just 0.2% in August after a 0.4% rise in July.

‘There is still enough in this report to keep the MPC concerned about money and credit growth. And although we expect nominal GDP growth to recover in Q3, the current pace is still a far cry from the near 5% trend in nominal demand the MPC wants to see,’ said Allan Monks, UK economist at JP Morgan.

Homes Borrow Least Money In 15 Years

(Reuters) – FINANCIAL INSTITUTIONS lent less money to households last month than at any time in the past 15 years, overshadowing a modest rise in mortgage approvals, official data showed today.

More doubt was cast on the effectiveness of the Bank of England’s quantitative easing policy, which aims to combat a shortage of cash caused by the credit crunch, after headline M4 money supply suffered its biggest drop since September 2004.

‘The Bank of England has repeatedly stressed recently that it will take time for quantitative easing… to fully feed through to support bank lending. There continues to be little hard evidence of this so far, which is potentially worrying for recovery prospects if the situation persists,’ said Howard Archer, chief UK economist at IHS Global Insight.

Net lending rose by £414 million in June, down from a £485 million increase in May, barely a ninth of last June’s rise after both new consumer credit and mortgage lending were much less than economists had expected.

This was the weakest figure since the Bank began collecting this data in April 1993.

New unsecured consumer credit slumped to £71 million confounding economists’ forecasts of a £300 million rise and also less than half a net £153 million in May, also revised sharply downwards.

Net new mortgage lending edged up to £343 million from £331 million, again far less than the £600 million in net lending that economists had expected.