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Unemployment in the UK is rising at the fastest rate since 1992, inflation has shot up faster than wage growth, house prices are falling and general economic confidence has slumped. Most economists feel that some form of a recession is now inevitable. These are some tips to help survive an economic downturn.

1. Don’t Panic

Things are bad, but the media tends to exaggerate the extent of a downturn. Statistics can be misleading as media tend to focus on the most eyecatching statistics. For example:

• Petrol and food prices are increasing by 20%, but, other items in the CPI are falling.
• Unemployment is rising at the fastest rate since 1992, but, comparatively it is much lower than any time in the 1980s.
• Recessions tend to be short lived 12-18 months. (see: How long do recessions last?)

2. Spend Frugally

With disposable income stagnating or even falling, spend frugally. Discount shops such as Matalan, Aldi and Primark have seen increased demand as people look for good value. A squeeze on household income is a good time to look at reducing unnecessary expenditure and making economies which don’t harm your living standards. See: Ways to avoid overspending

3. Stay Positive.

If your firm is looking to make redundancies, it is important you give compelling reasons for the firm to retain you. Dress smart, be cheerful and optimistic. Don’t annoy your boss by asking for a large payrise or always talking about redundancies. If you are willing to adapt to more difficult circumstances and work with a helpful attitude, the firm will be much more likely to retain you in any wave of redundancies.

4. Be Aware of Alternatives.

Don’t feel your present job is the only option for you. The labour market is becoming increasingly flexible for skilled and motivated workers. Stay alert for ways to increase your skill base or  options for second incomes. Don’t wait before you are made unemployed; keep your eyes out for alternative jobs - changing sector if necessary.

5. Different Sectors will be Affected in different ways

The current recession is hitting hard sectors such as construction, motor industry, real estate, retail and banking. If you are in these sectors it is even more important to work on alternative sources of income and jobs. Some sectors such as education may be largely unaffected.

6. Recessions create opportunities.

Recessions generally lead to lower demand. But, some sectors can profit from recessions. For example, high oil prices are encouraging people to consider cycling and public transport consider the options in these sectors.
7. Dealing With Unemployment
If, despite your best efforts, you are made unemployed, these are some tips

• Don’t feel guilty or bad
• Keep positive in your job search
• Be willing to consider jobs outside your previous employments
• Try to avoid financial misery create difficulties in your relationships. Talk through economic problems and avoid unrealistic expectations.

8. Struggling with Mortgage

If you are struggling with your mortgage payments, you may face a double problem of negative equity as well. There are various things you can do if struggling with mortgage payments, such as temporarily choosing interest only mortgage or extending mortgage term. See: Struggling with mortgage payments

9. Remember Money isn’t Everything.

Don’t feel that financial well being is the only thing that matters. Even in difficult times, don’t lose perspective and allow yourself to be depressed. With the right attitude a frugal lifestyle can have its own pleasures. Just remember the Monty Python sketch - The Four Yorkshiremen

THIRD YORKSHIREMAN:

But you know, we were happy in those days, though we were poor.

FIRST YORKSHIREMAN:

Because we were poor. My old Dad used to say to me, “Money doesn’t buy you happiness, son”.

FOURTH YORKSHIREMAN:

Aye, ‘e was right.

You Tube video

10. Budget

If your income falls, work out a budget to deal with the new financial reality. It may be painful, but, it is worse to live with the same expectations as before and end up with increasing levels of debt.

• What does it mean to be in a recession?

Original post by Tejvan R Pettinger

Recent data suggests that the UK’s long record of unbroken economic growth may, at last, be coming to an end. The latest snapshot of the UK economy presents a relatively good economic situation; however, this mask a variety of data suggesting the economic situation is sharply deteriorating.

The Bad News on the UK Economy

• Falling disposable incomes due to rising oil and energy prices
• Falling house prices. Falling house prices reduce consumer wealth, consumer confidence and the ability to remortgage. Rising house prices have long sustained UK economic growth, but, now prices are falling, the opposite is occurring.
• High Street Sales slumping. M&S has reported a series of disastrous results. Food sales fell by 4.2%, clothes sales by 6%. The problems of M&S are revealing because M&S targets the luxury end of the food market. It appears that price is becoming the important factor in consumer shopping. The likes of Netto and Aldi are likely to do fine in a recession as they target the best value, rather than selling the most expensive organic food at any price.
• Rising Mortgage Costs, despite base rates staying the same. The credit crunch is forcing up the cost of fixed rate mortgages.
• Rising inflation could even force the MPC to increase interest rates, a sure way to make the downturn worse.
• High Levels of Consumer Debt. For several years we have benefitted from high consumer confidence which has encouraged record levels of consumer debt both secured and unsecured. As confidence in the economy falls, consumers are likely to try and increase their savings ratio, leading to a fall in consumer spending.
• Government Borrowing is likely to increase to £60 billion, well above the governments target, leaving no room for expansionary fiscal policy.

The Good News on UK Economy

• A technical recession is negative growth of two consecutive quarters. This is still unlikely. Although many feel that growth of less than 1% is effectively a stagnating economy.
• The commodity price spike inflation can’t last for ever. When price rises moderate, disposable incomes will recover again.
• Recessions are an inevitability of a modern capitalist economy. We have avoided a severe downturn since 1991; evidence suggests this downturn will not be as severe. - There is no necessity for interest rates to rise to double digits as they did in 1991.
• A falling pound will help boost exports.

Related

• Are falling house prices good or bad?
• Mortgage woes lead house prices lower

Original post by Tejvan R Pettinger

This is a question I sometimes ask my economics students. - If you were the Bank of England governor what would you do?

To be fair, the MPC have quite a few difficult choice to make. The decade of low inflationary continuous growth seem to be over. The current economic situation includes the unwelcome development of both higher inflation and lower economic growth. This deterioration in economic prospects comes against a backdrop of falling house prices, a shortage of credit in the banking system and record levels of personal and government debt.

In one regard, the MPC have a simple target - keep inflation between 1-3%. However, although the government only set an inflation target, it is assumed they will be sensitive to other issues such as economic growth and unemployment.

Recently, the Bank forecast that inflation will rise to 4% by the end of the year. This is not unreasonable given rising food and energy prices. In normal times this would require higher interest rates to reduce the inflationary pressure. However, these are not normal times.

This inflation is caused by rising costs and not rising demand. The rising costs are squeezing living standards and consumer spending. Furthermore, falling house prices are discouraging consumer spending. With this ‘double whammy’ of rising living costs and falling house prices, the last thing the MPC should do is to be increasing rates. Higher rates at this stage of the economic cycle could tip the economy from sluggish growth into a full blown recession.

The problem is interest rates cannot solve both problems of lower growth and higher inflation at the same time. It may be they just to live with a worse trade off.

Reasons to Avoid Increasing interest rates.

True, inflation is rising, but, even 4% is much lower than past inflation problems such as 27% in 1979, 10% in 1990.

Much of this inflation is hopefully short term. If oil prices stabilise, if the government doesn’t have above inflation tax rises, then next year, we should expect the inflation to fall in 2009.

The slowdown in the economy is going to be quite marked and will help to reduce inflationary pressure.

Why the MPC is talking of Increasing interest Rates

They are worried the current inflation may lead to a permanent rise in inflation and inflation expectations. For example, they are worried at the prospect of a wage inflation spiral following from generous wage increases such as the shell drivers.

Personally, I think the prospect of a recession is far more damaging than an inflation rate of 4%. The MPC need to show some flexibility, to stick to rigidly to an inflation target of 2% in the current situation, would be to chase the wrong target.

Original post by Tejvan R Pettinger

According to the government’s official statistics, inflation is currently 3%. But,many people in the UK, would probably say that they feel prices are rising much faster than this official figure. Is the government method wrong? Are people right to be sceptical of official figures. What is the real Rate of Inflation?

CPI (Consumer Price Index).

Firstly the CPI rate excludes many factors. CPI excludes mortgage interest payments (so the recent rise in mortgage costs are excluded). CPI also excludes council tax rises (which are once again above inflation.

The old method of inflation is the Retail Price index RPI. This does include housing costs and council tax. The current RPI gives a higher inflation rate (4.3%) and has done for a long time.

RPI and CPI Inflation

source: ONS

Input prices

Input Price Inflation is rising at 15%. Materials and fuel inflation is approaching 30%. Input prices are often a lead indicator. i.e. because input costs are rising now, we can expect higher inflation in the future. ONS

Some Goods Are Rising Much Faster than inflation

Petrol prices are rising very rapidly. Nearly 30% increase in the past few months. This takes a big part of people’s spending and is a very visible figure. If you drive anywhere, you can’t help but notice the rise in petrol. Therefore, there is a constant reminder of this important barometer of prices.

Food prices

Some food prices are rising at an inflation rate of 20%

Mortgage costs rising.

Banks are increasing their own commercial mortgage rates. Meaning people with mortgages are facing much higher living costs. According to the Times, mortgage costs have risen £1300 in the past 6 months [link]

Some goods are falling or rising slower than inflation.

CPI attempts to measure the average basket of goods. Some goods are rising by 20%, but, other goods are still falling in price. For example, mobile phones, and electronic goods. These do not receive the same headline news as rising oil prices. As a general rule, the media focus on the bad news

(`Record rise in oil prices` - makes front page new)

(”electronic goods from China still falling in real terms” - is never going to make front page news.

Therefore, we tend to give more weighting in our mind to rising prices. We feel bad about price rises, but, tend to give less importance to the prices that are falling.

People’s inflation rates are different.

This is another big problem with CPI. If you have a variable mortage, pay council tax, spend alot on food and petrol, your personal inflation rate is likely to be much higher than the official figure. If you don’t spend on these goods, e.g.  buy CDs and ipods, then your personal inflation rate could be lower than the national average. Some people are becoming worse off, some are becoming better off. There is a big divergence in price rises amongst different groups of goods. Different groups of people will have different rates of inflation.

What do you think? Do you feel prices are rising by more than 3% per year?

Original post by Tejvan R Pettinger

The Key Economic statistics:

• Inflation 3%
• Economic Growth 2.5%
• Unemployment 5.3%
• Interest Rates 5%
• Current Account deficit 4.2%
• Government borrowing 2.8%

• These statistics taken from National Statistics online. [link]
• Note many forecast a deterioration in economic growth. These statistics tend to be backward looking; i.e they reflect what has happened in the past.

Snapshot of UK House Prices

• Halifax House Price Index May 08 average house Price - £184,111

Halifax House prices Monthly change - 2.40%

Halifax Annual House price change (last 12 months -3.80%)

• Land Registry Monthly Report April 08 average house price £183,626

monthly change - 0.20%

Annual Change in house prices 2.70%

Inflation Figures

• CPI Inflation - 3%
• RPI inflation - 4.2%
• note CPI inflation is the official method it excludes housing costs and taxes.
• Inflation at National Statistics

GDP and Economic Growth

• GDP Growth in last quarter ̫ 2008 - 0.4%
• Annual Rate of growth in past 12 months - 2.5%
• This is very close to the long run trend rate of growth
• GDP at National Statistics

Interest Rates

• Base Rates are currently 5%. They have been reduced from 5.5% since start of year
• Bank of England interest rate decisions link here
• Forecasts for interest rates 2008/09

(more…)

Recently, the Governor of the Bank of England indicated that the UK faced the prospect of recession. He pointed out some of the factors that are slowing the UK economy down.

Falling House Prices. Falling house prices is an important barometer for state of economy. It affects consumer wealth and consumer confidence. IF house prices continue to fall, more will be pushed into negative equity which will reduce spending.

Rising Cost of Living. Rising food and energy prices is increasing the cost of living and making people less able to spend on other things.

Slow Down In Other Economies. Both the US and EU face lower growth. If our main trading partners slow down it will affect our exports.

Credit Crunch. Shortage of credit is making it more difficult to borrow, not just for mortgages but also firms wishing to invest.

How Will Recession Affect Housing Market?

• A recession in the UK, would lead to falling demand for houses. If unemployment rises then less people will wish to buy houses; there would also be a rise in home repossessions, which would reduce the demand for housing.
• Interest rates? Usually in a recession interest rates fall. But, the Bank of England are worried about rising inflation. They point to CPI reaching the governments target of 3%. Therefore, they are reluctant to cut rates. Therefore, if a recession is accompanied by inflation then it becomes more difficult to cut rates and makes the downturn more serious.

 Prospects of Recession in UK

Original post by Tejvan R Pettinger

On my Economics Blog, I wrote a piece trying to explain the current economic difficulties in the US.

The worrying thing for the UK, is that we share many similarities with the situation in the US. Although a UK recession is still less likely there are several similarities between the two economies.

Boom and Bust in Housing Market.

US house prices increased much faster than incomes. This was due to various factors such as, speculative buying, ‘unsuitable mortgage lending’ and unreasonable expectations over future house prices. Since 2006, US house prices have  fallen by 10%. UK House prices have increased even more (300% in past 10 years) than in the US , therefore, there is a similar scope for house price falls in the UK. Falling house prices would push the UK economy into recession as consumers see a decline in their wealth.

• However, I feel the UK housing market is less prone to a crash than in America. This is because house price rises are primarily due to shortage of supply, rather than speculation. Also in the UK, mortgage defaults are not as big a problem as in the US. I think it is more likely we will see a stagnating housing market in the UK. But, whatever happens to house prices it will definitely have a big impact on the economy. (more…)

  Original post by Tejvan R Pettinger

There is an article here about the prospects of recession in the US

Basically, a combination of falling house prices and financial instability is likely to cause significant falls in US consumer spending and a recession seems hard to avoid. However, I am impressed by the way the US monetary authorities are trying to deal with the difficult circumstances. They seem to have no hesitation in cutting interest rates to boost spending. The organised rescue of Bear Sterns may leave investors unhappy, but compared to the debacle of Northern Rock, it has many merits; maintaining confidence in the banking sector is vital to avoid any financial meltdown. With these attempts to inject liquidity into the banking sector, I would expect the US to limit the extent of the forthcoming recession. The main danger is if house price deflation continues to decelerate and consumers become insensitive to interest rate cuts. There is also a fear that there may be more ‘Bear Sterns’ in the background.

Recession in UK?

The UK is further away from a recession. House prices, key to the economy, are currently stagnating rather than falling. However, like the US, the UK has a very low savings rate and high rates of borrowing. This makes the UK vulnerable to the credit crisis which is pushing up interest rates for borrowers.

Unfortunately, the UK needs to rebalance the economy. It needs to reduce its borrowing and excessive spending (illustrated by current account deficit). This rebalancing is likely to involve lower consumer spending. The uncertain question is whether the downturn will be moderate and managed or escalate into a full blown recession. At the moment, the MPC certainly seem less keen to cut rates to increase demand for money.

Problems of personal debt in the UK 

Original post by Tejvan R Pettinger

Many had predicted the fall in house prices would precipitate significant cuts in interest rates to bolster the economy. However, it appears the UK may be experiencing the worst of both worlds. Not just slower growth but also higher inflation.

Factory gate inflation (the price of goods leaving the factory at wholesale prices) is at a 15 year high. This usually feeds through into higher consumer price inflation.

Rising food, energy and oil prices. Growth in demand from China and India plus constraints on supply mean that oil prices and food prices have been rising, this increases the general cost of living

Maybe house prices will not fall after all. A prediction for house prices today suggests that house prices may rise by 3% this year.

Another factor is the devaluation in the Pound. Since autumn the Pound has fallen 10% on its trade weighted index. A devaluation makes imported goods more expensive and boosts Aggregate Demand increasing inflationary pressure. (more…)

Original post by Tejvan R Pettinger

Looking at Economics fundamentals, it is hard to understand why the Pound rose so much against the dollar in recent years. I think the main reason for the Pound’s strength is that it offered an easy alternative to the dollar, but, in looking for an alternative to the dollar the merits of the Pound has been exaggerated. With the UK economy predicted to slow down, it is highly likely we will see a general devaluation in the Pound, not just against the dollar, but also against other currencies such as the Yen and Euro.

The Dollar’s weakness has been well documented, but unfortunately many of the reasons for the Dollar’s weakness are shared by the Pound.

Why Pound is Overvalued (more…)

Original post by Tejvan R Pettinger