23rd December 2010 by Shaun Richards
After pointing out yesterday that asset markets in general have had a good 2010 I wish to refine my point slightly with respect to equity markets. With the American S&P 500 closing up again at 1259 and the UK FTSE 100 rallying to 5983 and the German DAX closing at 7066 there is no refinement needed for the main western markets. However the pattern for the Far East has by no means been as good. For example the Japanese Nikkei 225 has had a good end to the year but remains lower than when it started it if only just. The Chinese Shanghai Composite equity index fell this morning and is down 12.9% overall in 2010 . The Australian ASX 200 index is down 1.47% which I have to confess is a particular surprise in an asset/commodity rich country. So those who went to Far East stock markets in the hope of economic growth leading to stock market gains have had a poor year.
Chinese interest-rates rise
The last couple of weeks have been dominated by the debate as to whether China would raise her interest-rates and when if she does. This would be in response to the uptick in her consumer price inflation rate to 5.1% that I wrote about on the 13th of this month. My opinion was and indeed is that in the end they are likely to have to raise interest-rates and it would be better if they got on with it. Not all economists share this view as I was reading an article yesterday suggesting that there would be no rate rise and if there was it wouldn’t do any good. Unfortunately for that author in an accident of timing I guess Chinese 7 day repo interest-rates have surged this morning by 1.5% to 5.67% as a liquidity squeeze hit home. So in a way China may well be getting a rise in interest rates without an official announcement. The increase in reserve ratios combined with a year-end liquidity squeeze may mean that markets will do the job for now, a slightly unusual position for a command economy to adopt perhaps but the facts are simply thus.
US Economic Growth and Housing Market
After slightly disappointing figures for UK economic growth yesterday markets waited for a similar update from the United States. Unlike the UK real GDP growth for the third quarter of 2010 was revised up slightly to 2.6% from 2.5% and as this is an annualised rate it was an improvement but a very marginal one. However if we look at the breakdown of the statistics there were some troubling influences. For example Personal consumption expenditure (PCE) growth was revised down to 2.4% from 2.8%, and changes in private inventories were estimated to contribute 1.61 percentage points to GDP growth compared to 1.30 percentage points in the 2nd estimate. This means that growth is likely to be lower than previously thought in the fourth quarter and maybe in the early part of 2011 as private inventories have expanded a lot in 2010 and are likely to be approaching a limit. There was hope that they would be replaced as an engine of growth by consumption but this now seems a weaker influence.
So it turned out that an improved headline figure was combined with a breakdown that had troubling implications for future economic growth. This was added to by figures from the US housing market as the level of existing home sales was at 4.68 million not as good as some had forecast and the fact that the overhang or inventory is 9.5 months is not good for a November in what is a very seasonal market. In short the report from the National Association of Realtors tended to suggest that house prices will continue to decline.
So in conclusion the picture for the US economy looks rather mixed. Some economic growth but not enough to put a dent in the level of unemployment and falling house prices. To this mix we have asset purchases by the Fed. and the tax cut/stimulus programme to factor in for 2011 but perhaps they do not now look quite so likely to lead to the improvement in the US economy that places such as Goldman Sachs have suggested.
The UK Housing Market
I wrote an article recently for the mindful money website where I suggested that the way that the Bank of England was ending its Special Liquidity Scheme could lead to a reduction in the supply of mortgage finance (with the implication it could reduce bank financing activity overall). Some specific numbers were as follows.
In total the Bank of England provided some £185 billion of support for the UK banking system in this way. It is now in the process of withdrawing this support which begs the question where will the banks get the money from? The scheme had been reduced to £128 billion by the end of September of this year but in the two months to the end of November it fell by a further £18 billion to £110 billion. Now if we look at this from the point of view of our banking system we can see two things. Firstly, liquidity has been withdrawn and secondly they can expect this reduction in liquidity to continue until the January 2012 deadline.
I thought then and indeed still do that this is an unwise strategy at this time and wondered about the possible effect on our housing market. Accordingly I was interested to see this today in the report of the British Bankers Association on housing finance in November.
Gross mortgage lending of £7.8bn in November was 13.5% lower than a year ago. Net mortgage lending increased by £1.5bn November, the lowest increase since August 1999, compared to £3.4bn in the same month in 2009.
They also have some charts for net and gross mortgage lending since November 2006 which in essence both show a declining trend. Now whilst I am not suggesting that a return to those heady overheated days would be wise but what I am suggesting is that we are supposed to be in a phase where our banks are recovering or at least that is what we are told. Personally I feel that this is very questionable and the evidence of the lending to the housing market makes this clear. The Bank of England should take much more care in withdrawal its liquidity schemes in my view as 2011 is already set up to be one for a weak housing market and it would not take a lot to accelerate price falls.
Eastern European Housing Markets have a problem
After writing on Tuesday about how many borrowers in Eastern Europe had taken out mortgages in other currencies with the Swiss Franc to the fore because of its history of low interest-rates I thought that I would highlight the impact this must have on housing markets there. The Euro/Swiss Franc exchange rate is now 1.2495 so the Swiss Franc has extended it rise even further. If we look at the specific case of Hungary then those with Swiss Franc mortgages have seen their debt rise by nearly 2% since then and their debt is now 10% higher than a month ago. These sort of figures must be a millstone around the necks of the mortgage and housing markets in this area.
I wrote yesterday on the subject of Allied Irish Bank and the way that concerns over her in particular but Irish banks in general were continuing to affect Ireland even after her rescue package.
Added to this Allied Irish Bank placed more than 9 billion Euros with the bad bank Nama leading the blogger Jagdip Singh who has a good track record to question if AIB is solvent.
It seems that this suggestion was well founded because today the Irish Times has announced that the Irish government has drawn up plans to put a further 3.7 billion Euros into AIB. This will need to be followed by another 6.1 billion Euros next year if she is to met the new capital requirements. I do not know about you but suddenly the 85 billion Euro rescue package seems a lot smaller. Also the 3.7 billion will be provided by the National Reserve Pension Fund which in my habit of sometimes addressing economic issues with song titles has me imagining Irish pensioners singing “What have I done to deserve this?” by the Pet Shop Boys.
Also the law of unintended consequences may have an impact here too. So far Ireland has managed to keep the debt issued by its bad-bank NAMA off its sovereign debt but as it is about to in effect nationalise AIB which is a NAMA shareholder then this piece of Eurostat approved financial alchemy is likely to come to an end which will raise Ireland’s national debt by some 30 billion Euros.