Chancellor Alistair Darling described the current global financial crisis as ‘the biggest economic shock since the Great Depression’ on Friday but was at pains to stress that a crash in the housing market on the scale of the 1990s was unlikely. He urged banks and building societies to pass on last week’s interest rate cut by the Bank of England to homeowners, saying it was time they ‘played their part’.
He was keen to add that the outlook was much brighter than in the early nineties, with both unemployment and interest rates much lower. He commented, ‘The fundamentals are much, much better than they were at that time and I'm determined that we do everything we possibly can to support homeowners, businesses and the wider economy.’ Observers were keen to point out that the comparison with the Great Depression referred solely to the financial crisis and was not to be taken to mean the wider economic picture.
Many critics feel the interest cut last week, down to 5%, is too little, too late and warn it will not help homeowners sufficiently, despite some of the UK’s largest mortgage lenders immediately promising to pass on the reduction to their customers. Those making this commitment included Halifax, Woolwich, First Direct and NatWest, whilst HSBC astounded many by bucking the trend and claiming it will match existing fixed rate deals. However, not all lenders were as generous. Alliance and Leicester altered its mortgage pricing twice in three days; Nationwide raised the cost of some of its fixed rate deals for the second time this fortnight; and Abbey raised the cost of its 2 year tracker deals by 0.35%.
Adam Sampson from the housing charity Shelter felt that the cut ‘will do very little to help the tens of thousands who face repossession, rising bills and falling disposable incomes’. Economist Catherine MacLeod from advisers BDO Stoy Hayward agreed, saying ‘This cut isn’t going to make life easier. At best what can be hoped for is it reduces some of the squeeze consumers are under.’
Meanwhile, the Bank of England itself has warned there could be a ‘sharp’ slowdown in the economy due to ‘disruption in financial markets’. This disruption will certainly be felt by ISA investors in the coming weeks as financial statements for the past six months begin to be sent out. After 3 years of strong growth, investments have shrunk rather than grown. In the worst case scenarios their investments have fallen by almost 40%; whilst the average £7,000 investment made in 2007 is now only worth £5,500. Around 9 million valuation statements will fall on the doormats over the next few weeks, bringing home starkly how the global financial crisis is affecting the man in the street.
Britons will also feel the financial pinch when they holiday abroad, with the Euro hitting new highs against the pound. Over the past twelve months sterling has slipped 17.5% against the Euro, making the summer holiday abroad a much more expensive proposition this year compared with last. Within the Eurozone, Spain is the least expensive country to visit, with Bulgaria topping the table for the cheapest European destination outside the zone. A Euro now costs around 80p; leading Helen Warburton, head of travel at the Post Office, to comment, ‘We believe holidaymakers will look very carefully this year at how to get the best value for their money.’ Thomas Cook, however, reported that although prices were 8% higher than last year, bookings are still buoyant with Britons determined to defy the economic chill and make the most of the sunshine while they can.