WHAT’S AT STAKE IS WHETHER RECESSION TURNS INTO DEPRESSION

WHAT’S AT STAKE IS WHETHER RECESSION TURNS INTO DEPRESSION

The U.K. economy contracted 1.5% in the fourth quarter, the biggest contraction since 1980, as consumers cut spending. Brown’s government last month ordered Northern Rock, the nationalised bank, to expand lending to help the economy. Ministers also agreed to guarantee £325billion of Royal Bank of Scotland Group Plc’s investments. Chancellor of the Exchequer Alistair Darling suggested yesterday that the Bank of England could start printing money as soon as this week, as interest rates lose their ability to revive growth. Policy makers may lower the key rate by a half point to the lowest since the bank was founded in 1694.

BoE Governor Mervyn King said in February he’ll buy up to £50billion pounds of debt “as soon as possible,” after cutting interest rates to a record low failed to open debt capital markets to the companies that need cash most. The last borrower with non-investment grade ratings to sell bonds in pounds was Dutch electric-generation company Intergen NV in July 2007, when credit markets froze for all but the safest borrowers. The bond-buying program comes after the central bank started to purchase commercial paper last month, and is the next stage toward quantitative easing, where Governments increase money supply to reduce its cost and stoke the economy. Policy makers are trying to ease access to funding after banks worldwide lost or wrote down $1.2 trillion since the start of the credit crisis. Investment-grade companies including Tesco Plc, the U.K.’s biggest supermarket operator, and Imperial Tobacco Group Plc, the maker of West and JPS cigarettes, have sold £27.9 billion of bonds in Britain’s currency this year. This almost three times the amount issued in the same period of 2008.

Policy makers have reduced the U.K.’s interest rates from 5.75% to an all-time low of 1% since the end of 2007; and are expected to further cut it to 0.5% on March 5. Britain’s economy shrank 1.5% in the fourth quarter of last year, the biggest contraction since 1980, as consumer spending declined. Chancellor of the Exchequer, Alistair Darling, yesterday suggested in an interview in the Daily Telegraph that the BoE could start quantitative easing, or printing money to buy bonds, as soon as this week. . Gordon Brown has also given banks loan guarantees and pushed them to make more finance available to help the economy weather its worst slump in three decades.

U.K. consumer confidence stayed close to the lowest level in at least four years in February as the recession persisted and companies cut jobs, Nationwide Building Society said. An index of sentiment rose to 43 from 41 the previous month, which was the worst result since data began in 2004, the mortgage lender said in a statement today. “Consumers’ views about the current economic and labour market conditions are in line with the recessionary climate in the U.K,” Fionnuala Earley, chief economist at Nationwide, said in the statement. The confidence gauge still rose on the month for the first time since October. A measure of attitudes on buying household goods and making major purchases rose seven points to 92, the highest since October 2006, while an index on expectations for the future increased 5 points to 57. The gauge of attitudes on the present situation fell 2 points to 22.

How does that this affect the markets? The severe stresses in global equities are adding extra weight and support to the "safe haven" US dollar. However, given that the dollar is already trading strongly, and given the latest reports from AIG insurance and the car manufacturers, in financial markets and the US economy, it could be seen that there are limits to the market's appetite to buy dollars. Add to this that in US yesterday; there was more bad news for the housing market. Pending home sales for January fell 7.7% hitting a new all-time low going back to the start of the index in January 2001.

Today’s data sees UK PMI at 09:30 GMT and US ISM non-manufacturing this afternoon at 15:00 GMT.

Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx

This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.

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