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UK economy: death spiral begins

Posted by seumasach on August 10, 2010


10th August, 2010

House prices fall as economy sees house prices fall

Government austerity measures are already plunging the British economy into reverse according to figures published today which reveal sagging high street sales and renewed falls in house prices.

Expectations of widespread job cuts in the public sector have begun to discourage households from moving home or buying “big ticket” items such as furniture and carpets, with spending going on essential items and replacements only, said the British Retail Consortium. One of the worst-hit sectors is big-screen flat televisions, where sales have slowed markedly, but the BRC also noted year-on-year falls in items such as shoes. It said that high street sales are running 0.5% higher than last year on a like-for-like basis, with the small rise largely due to food price inflation. “Talk of public spending cuts is unsettling consumers and they are concentrating on essentials,” said the BRC director general, Stephen Robertson.

The property market is also suffering a fresh downturn, said the Royal Institution of Chartered Surveyors in a report today, with valuers across the UK blaming the decline on anticipated public sector job losses. The RICS housing market survey found that house prices fell in July for the first time since July 2009, with a continued lack of mortgage finance also deterring first-time buyers.

Some surveyors and valuers told the RICS survey they had been staggered by the ferocity of the market downturn since the coalition government’s emergency budget in June. One firm in Shropshire said: “The market is the worst it has ever been. The government’s determination to balance the books has undermined confidence,” while another in Lincoln said: “The large number of redundancies expected has had a negative impact on the market.”

The RICS added that a surge of new properties put on the market was driving down prices, which it said may be partly a result of the government’s abolition of home information packs and sellers testing the market. Some surveyors warned of a new wave of repossessions. “More repossessions are starting to come through and make up a high proportion of monthly sales but at low prices, which could result in values spiralling downwards through a difficult winter,” said a firm of surveyors in Huddersfield.

Staycationing holidaymakers and the hot early summer weather have boosted grocery retailers, said the BRC, but other high street shops are struggling to shift stock without heavy discounting.

Helen Dickinson of accountants KPMG said: “Summer sales, some of which started earlier this year, did little to entice consumers back in any decisive way as confidence has been affected by concerns over the future impact of fiscal changes – but spending at least continues to hold up and is likely to continue to do so, at least until the effects of Government measures begin to hit people’s pockets.”

Even sales of goods over the internet, the fastest growth area in retail, have begun to slow. The BRC said year-on-year sales growth was 11%, far lower than the 20% increases earlier this year. Robertson said the slowdown reflected “customers’ mounting nervousness about making major spending commitments”.

A regional breakdown of retail sales figures will not be published until later in the month, but the BRC said the evidence so far suggests that high street sales are weakest in areas of the country where public sector employment is highest.

“Sales in London are significantly better than the rest of the UK, partly because of the number of overseas visitors attracted by the fall in sterling. It is in other parts of the UK which have a bigger proportion of people working in the public sector where people are most unsettled about their prospects.”

Households are also having to rein back spending on luxury items to cope with a surge in food price inflation and higher petrol prices. Yesterday the association representing 9,000 petrol forecourt sites warned petrol prices could rise by as much as 4p a litre by this August bank holiday, smashing the current record high of 121.6p. There are also growing fears of a rise in food prices following intense speculative activity on commodity exchanges.

Both the British Retail Consortium and the petrol retailers called for a delay in any rises in interest rates. “It’s clear the recovery continues to need support. The Bank of England must resist pressure to increase rates too soon,” said Stephen Robertson of the BRC.

City experts said the worsening economic outlook was pushing the prospect of rate rises further into the distance. Mike Riddell of M&G, a major investor in government bonds, said inflationary pressures in the UK would subside next year. “The bond markets clearly think there is a very real and increasing risk that the developed countries are going to end up looking like Japan.” Some US government bonds fell to an all-time low at the end of last week, suggesting that interest rates will remain ultra-low as the West becomes “enmeshed in a Japanese-style deflationary outcome”, he said.

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