Will there B&B a recession?

For the manufacturing sector – which is, unlike financial services sector, productive – a recession is approaching:

UK manufacturing showed no growth last month for the first time in almost three years, a survey has shown, but there was no let-up in inflationary pressures as firms raised prices at the fastest pace since the index began.

The Chartered Institute of Purchasing and Supply/NTC purchasing managers’ index fell to 50.0 in May from 50.8 – the weakest figure since July 2005. The index measures activity among UK manufacturers, with a level above 50 indicating expansion and below showing contraction.

Vicky Redwood at Capital Economics said the figures suggested the “industrial sector is on the verge of recession”. The Cips survey was more pessimistic than EEF data published yesterday that showed a slight pick-up in orders. However, Cips is a broader measure than the EEF, which focuses more on high-end engineering, such as carmakers.

Both surveys pointed to firms increasing prices to offset rising raw material, energy, component and freight costs.

The purchasing managers’ output price index rose to 62.0 from 61.9 in April. Output prices rose in each of the past 34 months, the most sustained output price inflation since the series began in 1992.

More evidence that retailers are passing on rising costs to customers may concern the Bank of England’s monetary policy committee when it meets this week to discuss interest rates. The MPC kept interest rates on hold at its meeting last month because of concerns over inflation.

Howard Archer at Global Insight said: “The further rise in the prices-charged index in the purchasing managers’ survey reinforces the belief that the Bank of England will not be cutting interest rates again soon, even though weak manufacturing activity adds to fears that the economic downturn is deepening.”

The input price index eased slightly from record highs the previous month but remained at an uncomfortable level of 75.9. New manufacturing orders fell for a fifth month. Weak domestic demand was the main drag on total order books as new export orders posted a slight gain.

Archer said: “Most manufacturing data and survey evidence indicates that the sector is now buckling markedly as it is pressurised by slowing domestic demand, weaker activity in key export markets, elevated energy and commodity prices, and tight credit conditions.”

The bail-out of Bradford & Bingley by a US private equity company – in return for almost a quarter of the bank – shows how unstable the banking sector is, and how chaotic it will become:

Bradford and Bingley collapse brings UK recession closer
By Socialist Appeal
Monday, 02 June 2008

Bradford and Bingley are the latest bank to catch a cold in the present financial crisis. They’ve declared a loss of £8m for the first four months of 2008. This compares with £108m profits they made in the same period last year.

The main reason for the losses is because they’ve had to write down £89m of their assets. ‘Write down’ is banker-speak for the fact that they realise they can whistle for their money.

B & B is the market leader in ‘buy to let’ mortgages. One of the features of the housing bubble which has now burst is that people were buying houses, not only to live in, but also to lease to other people. This of course tended to push house prices even higher. ‘Buy to let’ was based on the assumption that house prices would just keep on rising. In that case not only had the buyer acquired an ever-appreciating asset, but they could also make enough money by letting it out to pay the mortgage. Free money!

When the housing bubble burst, the whole logic of ‘buy to let’ went into reverse. Not only is the house price going to fall after the deal has been struck, so the buyer is in effect stuck in negative equity, but tenants are expecting to pay less rent, since they know house prices are headed south. The ‘buy to let’ market, worth £120bn last year is now effectively dead in the water. And of course all those people jumping ship from the housing market will make the house price collapse that much worse.

So the number of those in arrears with B & B has risen sharply this year. It’ll get worse. The bank has had to sell 23% of its shares to the private equity firm Texas Pacific for £179m. Texas Pacific are not philanthropists. They buy into firms for what they can screw out of them. Bradford management are playing a dangerous game.

B & B have also been forced to ask for a rights issue of £258m. This means that shareholders are expected to reach in their pockets and stump up for extra shares. Now ‘investors’ don’t really buy shares so they can have further demands put upon their wallets. They expect to sit at home and watch the dividends roll in and the shares going up. So a rights issue will always hit existing share prices.

And so it has proved. Bradford shares have dropped by two thirds in the past six months and fell 40% in the last month. The announcement of the loss meant B & B shares took a further tumble. The panic spread to other bank’s shares. After all, they’re all in the same pickle.

Bradford and Bingley have just demonstrated they had an urgent need for more than £430m. These are panic measures. You can be sure they’re in big trouble.

We can all have a good laugh at the problems of financial institutions. But the trouble is, the financial crisis is impacting on the real economy. House prices are now definitely falling in the UK – maybe by 10% a year, maybe more. Does that mean it’ll be easier to buy a house? No, it will be harder. Interest rates are higher, which means a mortgage will cost more. The Bank of England would probably like to cut rates, but inflation is on the rise, so that’s ruled out. The banks are adjusting over a million mortgage interest rates this year, and it’s going to hurt. They are determined to spread their own misery around to the rest of us.

The level of mortgage approvals has actually halved over the past few months, since the house price bubble burst. No longer will the likes of Northern Rock chuck 125% mortgages at borrowers, so you can build a patio and have a holiday in Thailand while you’re buying a house. No, they want only fine, upstanding and, above all, solvent citizens on their books.

A house price collapse doesn’t just affect the unfortunates who buy at, say, £200,000 and find their precious house is only worth £150,000 a year later. They’re stuck in negative equity. They can’t afford to pay for the house and can’t move out. Negative equity blights whole neighbourhoods, as it did in 1992 in the last house price collapse.

And of course it brings new housebuilding to a stop. There are early signs that that is already starting to happen in Britain.

The Financial Times published an article (June 1st) headed ‘UK nears recession’. They quote Michael Saunders of Citigroup as saying. “Lots more economic pain lies ahead. The UK economy is heading close to recession and the recession risks are rising.” The recession is an inevitable outcome of unplanned capitalism, interested only in profit. It’s not our fault. Let’s make sure they don’t dump the pain of their recession on the working class.

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