Weekly Financial News Roundup
The week opened with further bad news for the Lloyds Banking Group. Shares in the Group, in which the British Government now has a 43% stake, fell by 7% in early trading on Monday compounding a loss of 32% the previous Friday as investors struggled to come to terms with annual losses of over £10 billion in its Halifax Bank of Scotland (HBOS) subsidiary. To make matters worse, Lloyds Banking Group was also embroiled in a row over the £120 million in bonuses that it plans to pay to its staff regardless of the losses incurred and the Government bail-out. There was cross-party criticism of the proposed move with Employment Minister, Tony McNulty, saying "I would draw the line between the senior managers, board members, executives, those responsible for the business model and strategy that got them into the mess. They shouldn't get a penny" according to the BBC website, whilst Leader of the Opposition, David Cameron, said "For banks that are owned by the taxpayer or where the taxpayer has a large stake it is wrong to be paying bonuses" and Vince Cable for the Liberal Democrats told Andrew Marr "No bonuses should be paid to banks that have failed and are dependent on the taxpayer" during an interview on BBC television.
More bad news too for the ailing British car industry, with the announcement that car maker BMW is to shed 850 jobs at its Mini plant in Cowley, Oxfordshire, and identified a further 150 surplus jobs at its similar plant in Swindon. The Cowley plant will close for a week and weekend working will cease when new shift patterns come into operation in early March.
There was cause for at least tempered optimism on Tuesday with the announcement that inflation, as measured by the Consumer Price Index, fell to its lowest level since April 2008 in January. The fall – to 3% from 3.1% in December 2008 – was lower than anticipated, however, as the result of rising prices for alcoholic beverages, for example, and a lower than usual level of discounting generally during January sales. The Royal Institution of Chartered Surveyors (RICS) also reported that falling house prices – prices fell by 10% in 2008 as a whole reducing the price of the average home by nearly £23,000 – are stimulating interest amongst potential buyers. RICS' Chief Economist, Simon Rubinsohn, was quoted on the BBC website saying "Interest from owner-occupiers is likely to persist over the coming months as those with large deposits look to capitalise on the drop in house prices." First-time buyers, however, are still likely to struggle to establish themselves on the property ladder.
Banks – Lloyds Banking Group, Royal Bank of Scotland and indeed the Bank of England – once again took centre stage from midweek onwards with Chancellor of the Exchequer, Alistair Darling, outlining bonus limits at RBS and the Prime Minister, Gordon Brown himself, writing an article in The Times newspaper in which he described how the Government was working "to agree a fair package for staff" at the Lloyds Banking Group. Mr. Brown reiterated his desire "to end the short-term bonus culture" in banks bailed-out with taxpayers' money – the Government now holds stakes of 43% and 70% respectively in Lloyds Banking Group and RBS – without undermining banking staff.
Perhaps the most important financial announcement of the week, however, was that by the Governor of the Bank of England, Mervyn King, on Thursday. Mr. King revealed that he was to write to the Chancellor requesting permission to begin the practice of "quantitative easing". This essentially involves buying government and corporate bonds and other assets in an effort to put more cash into the economy – the modern equivalent of printing money if you like – and is unprecedented in recent times. Desperate times call for desperate measures – cumulative interest rate cuts, for example, have failed to stimulate consumer confidence or spending and unemployment continues to rise at an alarming rate – but the latest move appears to be an indication that the Bank of England is running out of ideas as the deepening recession threatens to become depression. Critics of the move said that it was irresponsible, likely to weaken Sterling still further and cause inflation; the spectre of "hyperinflation" as experienced in Weimar Germany in the Twenties was also mooted as a possible outcome. The crux of the problem is that because quantitative easing is unorthodox, no-one really knows how much is too much and the possibility of destabilising the economy remains very real indeed.
Signs of the deepening recession were also all too obvious for the remainder of the week. Figures released by the Council of Mortgage Lenders (CML) suggest that mortgage lending fell by 8% in January when compared with December and 52% when compared with the same month a year ago. The total figure of £12.4 billion was the lowest recorded since April 2001.
Further woes for JJB Sports too with the announcement of the closure of 45 of its 77 OSC and Qube stores – both subsidiaries are already in administration with no sign of a buyer – and over 400 redundancies as a result. JJB Fitness Clubs, of which there are more than 50, may also be under threat in due course.
The extent of the slump in car production in recent months was brought sharply into focus on Friday with the Society of Motor Manufacturers and Traders (SMMT) releasing figures suggesting that the number of new cars produced during January 2009 was down fully 58.7% when compared with January 2008. New car sales – along with sales of many other luxury items of course – have been hit by falling demand as the economy as a whole slows down and many car manufacturers have been forced into extended winter shutdowns to compensate. SMMT Chief Executive, Paul Everitt, was quoted on the Society's own website saying "Following extended winter shutdowns, vehicle output continued to fall in January in line with expectations. The extent of the decline highlights the critical need for further government action to deliver the measures already announced and ease access to finance and credit."