Yet another look at the UK economy

Revolutions and earthquakes abroad could cause trouble at home

Made in the UKMade in the UK
The UK economy, how's it doing? Well Mervyn King is not exactly confident is he? There's less talk of domestic matters now since the revolutions in North Africa. These events are pushing oil prices to painful levels and it is this price rise that will cause all sorts of trouble. A recent post on EU Referendum suggests the older age group is to see a rise in debt problems. This age group tends to own a house so could be thought of as having great potential wealth. At the other end of the age range students will find university fees rise to the maximum permissible, so their debt burden will also. This means their grasp on the housing market further weakens unless house prices fall. This may well happen and for more on students debt problems see HERE.

The always fragile Buy-to-Let market sector could well be heading for trouble again, see HERE. As for this market this is what we wrote in January 2008 about the property price crash -

The Buy-to-Let (BTL) housing market was no longer the place to be. At first BTL was promoted as if it was an almighty, benign and unstoppable force for good. But time moves on. In early spring 2007 I got an opinion from a Midlands-based bank official who described the new entrants to BLT as amateurs. His was not a sneering remark but made more in a mix of annoyance and exasperation. For he knew that many of them had set themselves up for a bleak financial future, as they lacked the experience of the proper professional landlord. He also knew of pros who had got out of some aspects of BLT as soon as they saw the amateurs moving in. Not so much, there goes the neighbourhood, as, there goes the profit. Few of these amateurs would have bought their property wisely with the right mix of financial resources. Most would have taken a simple approach and used mortgages alone. In some cases the income from the Let paid the 'other' mortgage, this was the mortgage on the family home, hence the exasperation of the bank official. There was no business plan, no plan B, and no escape. In fact this was not business but madness.

And nothing has changed. In the years between then and now the BTL has had a few ups and downs. The former was a hoped for surge in demand when, so theory had it, mortgages would be hard to come by and thus people would rent and not buy. As for the latter, the downs, well it's a mixed bag. Some parts of the UK and some property sectors are well down, others less so. In all probability the budget will have an impact upon all of this. George Osborne might as well get the pain over in the first years of his reign. There is evidence to show that a property price crash would be beneficial to the UK.

A country, (but not it would seem Ireland!), can default on its loans then devalue its currency; Iceland is a recent example. This cleared the way for a new era, so too could a property revaluation. But all this speculation, along with Osborne revising income tax and National Insurance into a single deduction either predates or presumes the upheavals in North Africa won't have an impact on the UK. The price of oil, well there's a thing, that's all ups and downs too at the moment. But the real unknown is the crisis in Japan.

The British motor industry consists of companies like Honda in Swindon and Nissan in the Tyne and Weir. Some sweet souls have,, in a deluded manner wondered aloud if the damaged factories in Japan could switch production to these UK based plants. This is a bit like hoping the recent mortgage famine would help the Buy-to-Let property sector. Still dreams are cheap. For do remember that when the financial downturn was at its worst, Honda dealt with this by laying off its workforce for a few months and closing the factory. Japan is the other side of the world but the third largest economy. Unlike China and the USA it is a small country with very limited natural resources. It has got over this by spreading out into other regions, the factories in Swindon and Tyne and Weir are typical. There will be repercussions; add this to the already febrile situation caused by the PIGS and we can see that Osborne has some tricky times ahead.

Case study

The Makita company, famous for its power tools has a factory at Telford, Shropshire. Originally British companies like Black and Decker and also Wolf of Hanger Lane, London made such tools in the UK. If these brand names still exist they will now be made in China. Thus another industry has gone the same way as the British Motor industry. Hence the Makita factory is vital to 'British' manufacturing.