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UK construction suffers shock contraction; IMF warns on household debt – business live UK construction suffers shock contraction; IMF warns on household debt – business live
(35 minutes later)
3.22pm BST
15:22
Some disappointing data from the US.
The Institute for Supply Management’s current business conditions index for New York fell to 49.7 in September, down from 56.6 in August. A reading below 50 signals contraction.
#UnitedStates ISM New York Index at 49.7 https://t.co/fk69bW3bk1 pic.twitter.com/WNw6T1wg4z
3.10pm BST
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And if you think you’ve heard the words “record US stock market highs” many times before in the past few months, well, you have:
So far this year we've had 40 fresh record highs for S&P, 43 for Dow, 51 for Nasdaq Comp, 58 for Nasdaq Tech.
Interestingly, of the 30 Dow stocks, only 18 made a fresh record high this year, only 12 made >10, only 10 made >15, BUT 6 made >30
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US markets hit new peaks
DING DING! The US stock market has hit fresh record highs at the start of trading in New York.
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Today’s report also highlights how Canada has gone on a household debt spree since the financial crisis, while American families have managed to cut their borrowing burden.Today’s report also highlights how Canada has gone on a household debt spree since the financial crisis, while American families have managed to cut their borrowing burden.
Canada’s economy has posted sparkling growth earlier this year, while house prices have also soared. If the IMF are right, there could be a reckoning at some stage....Canada’s economy has posted sparkling growth earlier this year, while house prices have also soared. If the IMF are right, there could be a reckoning at some stage....
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The IMF also warns that the least wealthy are being dragged deeper into debt, and will suffer the most if there is an economic crisis.The IMF also warns that the least wealthy are being dragged deeper into debt, and will suffer the most if there is an economic crisis.
Today’s report says:Today’s report says:
Lower-income groups tend to be more vulnerable. Household surveys confirm that, within countries, the share of lower-income households in total debt has grown.Lower-income groups tend to be more vulnerable. Household surveys confirm that, within countries, the share of lower-income households in total debt has grown.
These households typically have higher debt-to-income, higher debt-service-to-income, and higher debt-to-assets ratios, which makes them more vulnerable to adverse shocks than higher-income households.These households typically have higher debt-to-income, higher debt-service-to-income, and higher debt-to-assets ratios, which makes them more vulnerable to adverse shocks than higher-income households.
This chart shows how a build-up of household debt can create a vicious circle:This chart shows how a build-up of household debt can create a vicious circle:
As you can see....once banks cut back on lending, asset prices fall, households default on their debt, hitting bank capital reserves, leading them to cut back on their lending etc etc.As you can see....once banks cut back on lending, asset prices fall, households default on their debt, hitting bank capital reserves, leading them to cut back on their lending etc etc.
2.20pm BST2.20pm BST
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IMF: high household debt creates financial stability risksIMF: high household debt creates financial stability risks
Newsflash: The International Monetary Fund has warned that the rise in consumer debt risks destabilising the global economy.Newsflash: The International Monetary Fund has warned that the rise in consumer debt risks destabilising the global economy.
In a new report, the IMF flags up that increased borrowing can stimulate short-term growth, but it also creates financial instability.In a new report, the IMF flags up that increased borrowing can stimulate short-term growth, but it also creates financial instability.
The Fund says:The Fund says:
On average, an increase in household debt boosts growth in the short term but may give rise to macroeconomic and financial stability risks in the medium term. Real GDP initially reacts positively to increases in household debt, as do consumption, employment, and house and bank equity prices.On average, an increase in household debt boosts growth in the short term but may give rise to macroeconomic and financial stability risks in the medium term. Real GDP initially reacts positively to increases in household debt, as do consumption, employment, and house and bank equity prices.
However, after one or two years, the dynamic relationship between debt, GDP, consumption, employment, housing, and bank equity prices turns negative. Higher household debt is associated with a greater probability of a banking crisis, especially when debt is already high, and with greater risk of declines in bank equity prices.However, after one or two years, the dynamic relationship between debt, GDP, consumption, employment, housing, and bank equity prices turns negative. Higher household debt is associated with a greater probability of a banking crisis, especially when debt is already high, and with greater risk of declines in bank equity prices.
The warning comes in the analytical chapters of the Fund’s Global Financial Stability Report, which have just been published.The warning comes in the analytical chapters of the Fund’s Global Financial Stability Report, which have just been published.
In an accompanying blog post, senior IMF Nico Valckx spells out that increasing the ratio of household debt actually leads to lower growth, over say five years. The effect is particularly stark for advanced economies, as this chart shows:In an accompanying blog post, senior IMF Nico Valckx spells out that increasing the ratio of household debt actually leads to lower growth, over say five years. The effect is particularly stark for advanced economies, as this chart shows:
Valckz says that debt “greases the wheels of the economy”, letting people make an important big purchase and finance it over time. But too much grease ends up bunging the wheels of growth, he explains:Valckz says that debt “greases the wheels of the economy”, letting people make an important big purchase and finance it over time. But too much grease ends up bunging the wheels of growth, he explains:
At first, households take on more debt to buy things like new homes and cars. That gives the economy a short-term boost as automakers and home builders hire more workers. But later, highly indebted households may need to cut back on spending to repay their loans. That’s a drag on growth.At first, households take on more debt to buy things like new homes and cars. That gives the economy a short-term boost as automakers and home builders hire more workers. But later, highly indebted households may need to cut back on spending to repay their loans. That’s a drag on growth.
And as the 2008 crisis demonstrated, a sudden economic shock – such as a decline in home prices – can trigger a spiral of credit defaults that shakes the foundations of the financial system.And as the 2008 crisis demonstrated, a sudden economic shock – such as a decline in home prices – can trigger a spiral of credit defaults that shakes the foundations of the financial system.
More here:More here:
IMF warns that using consumer debt to fuel growth risks crisis https://t.co/mAd3HcfMuuIMF warns that using consumer debt to fuel growth risks crisis https://t.co/mAd3HcfMuu
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UK readers will be well aware that the cost of living in Britain has risen sharply in the last year, following the slump in the pound after the EU referendum.UK readers will be well aware that the cost of living in Britain has risen sharply in the last year, following the slump in the pound after the EU referendum.
Now, a new report has highlighted that inflation in the UK is outpacing other advanced nations, including Germany, the US and France.Now, a new report has highlighted that inflation in the UK is outpacing other advanced nations, including Germany, the US and France.
My colleague Richard Partington explains:My colleague Richard Partington explains:
The UK has the highest inflation rate among the world’s top economies, in the latest sign the Brexit vote is contributing to a squeeze on living standards.The UK has the highest inflation rate among the world’s top economies, in the latest sign the Brexit vote is contributing to a squeeze on living standards.
The increased cost of importing food and fuel is pushing prices to rise at a faster rate than anywhere in the G7 group of leading global economies, according to the Organisation for Economic Co-operation and Development. The UK is only behind Turkey, Mexico and the eastern European states of Latvia and Estonia in the club of 35 developed nations.The increased cost of importing food and fuel is pushing prices to rise at a faster rate than anywhere in the G7 group of leading global economies, according to the Organisation for Economic Co-operation and Development. The UK is only behind Turkey, Mexico and the eastern European states of Latvia and Estonia in the club of 35 developed nations.
The annual growth in prices in the UK jumped to 2.9% in August from 2.6% in July, equalling a four-year high in the consumer price index (CPI) reached in May earlier this year. That outstrips the average 2.2% growth in prices across the OECD for the same month.The annual growth in prices in the UK jumped to 2.9% in August from 2.6% in July, equalling a four-year high in the consumer price index (CPI) reached in May earlier this year. That outstrips the average 2.2% growth in prices across the OECD for the same month.
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Britain’s construction woes haven’t dampened the mood in the financial markets.Britain’s construction woes haven’t dampened the mood in the financial markets.
World stock markets remain at record highs today, following last night’s rally on Wall Street.World stock markets remain at record highs today, following last night’s rally on Wall Street.
In London, the FTSE 100 has hit a one-month high, up 9 points at 7448. Big exporters are benefitting from the drop in the pound this morning.In London, the FTSE 100 has hit a one-month high, up 9 points at 7448. Big exporters are benefitting from the drop in the pound this morning.
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Job threat to Norwich as Britvic pulls outJob threat to Norwich as Britvic pulls out
Hundreds of workers in Norwich face an uncertain future after drinks company Britvic announced plans to shut its factory in the city.Hundreds of workers in Norwich face an uncertain future after drinks company Britvic announced plans to shut its factory in the city.
The group is planning to move production of Robinsons and Fruit Shoot drinks from the Norwich factory to sites in east London, Leeds and Rugby by 2019.The group is planning to move production of Robinsons and Fruit Shoot drinks from the Norwich factory to sites in east London, Leeds and Rugby by 2019.
The 242 people who work there will be offered “redeployment opportunities at other sites”, says Britvic, or support to find a new job elsewhere.The 242 people who work there will be offered “redeployment opportunities at other sites”, says Britvic, or support to find a new job elsewhere.
The site is co-owned with consumer goods giant Unilever, which makes Coleman’s Mustard there. Unilever says it is now reviewing its own options; that could mean that production of the fiery condiment ends after two hundred years.The site is co-owned with consumer goods giant Unilever, which makes Coleman’s Mustard there. Unilever says it is now reviewing its own options; that could mean that production of the fiery condiment ends after two hundred years.
Local MPs and business leaders are rallying around, according to the local Eastern Daily Press.Local MPs and business leaders are rallying around, according to the local Eastern Daily Press.
Labour’s Clive Lewis tweets:Labour’s Clive Lewis tweets:
This is an awful prospect for hundreds of workers&their families across #norwich.Ill do all I can to save jobs here https://t.co/QJ4XmrCQwFThis is an awful prospect for hundreds of workers&their families across #norwich.Ill do all I can to save jobs here https://t.co/QJ4XmrCQwF
Chloe Smith, MP for Norwich North, says:Chloe Smith, MP for Norwich North, says:
“This is very sad news and many constituents will be very anxious about this possible closure. At this stage, I am urging the company to make every support available to those workers.”“This is very sad news and many constituents will be very anxious about this possible closure. At this stage, I am urging the company to make every support available to those workers.”
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David Montague, chief executive of London housing association L&Q, is urging the government to help British construction and provide some Brexit certainty.David Montague, chief executive of London housing association L&Q, is urging the government to help British construction and provide some Brexit certainty.
He fears that building firms will struggle badly if they lose access to workers from overseas.He fears that building firms will struggle badly if they lose access to workers from overseas.
“Today’s figures are worrying for the construction sector and at a time when more housebuilding is needed than ever before.“Today’s figures are worrying for the construction sector and at a time when more housebuilding is needed than ever before.
“We need assurance that an appropriate immigration policy will keep the doors open to skilled overseas talent and that there will suitable investment in training at home. Without this, the figures we are seeing today - will undoubtedly worsen.“We need assurance that an appropriate immigration policy will keep the doors open to skilled overseas talent and that there will suitable investment in training at home. Without this, the figures we are seeing today - will undoubtedly worsen.
“L&Q and many others in the sector have skilled workforces, strong partnerships, access to land and the financial strength to deliver very ambitious plans. What we need now is political and economic certainty.”“L&Q and many others in the sector have skilled workforces, strong partnerships, access to land and the financial strength to deliver very ambitious plans. What we need now is political and economic certainty.”
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Lending to UK firms at risk after Brexit, Bank of England warnsLending to UK firms at risk after Brexit, Bank of England warns
Britain’s builders aren’t the only people worrying about Brexit.Britain’s builders aren’t the only people worrying about Brexit.
The Bank of England has flagged up another concern this morning; that UK businesses could struggle to borrow after Britain leaves the EU.The Bank of England has flagged up another concern this morning; that UK businesses could struggle to borrow after Britain leaves the EU.
That’s because European banks who currently operate branches in Britain may have to upgrade to fully fledged subsidiaries after Brexit. If they don’t, they might not be allowed to operate. That would cut the amount of lending offer, the BoE fears.That’s because European banks who currently operate branches in Britain may have to upgrade to fully fledged subsidiaries after Brexit. If they don’t, they might not be allowed to operate. That would cut the amount of lending offer, the BoE fears.
My colleague Jill Treanor explains:My colleague Jill Treanor explains:
Companies from European Economic Area countries – EU member states, Iceland, Liechtenstein and Norway – provide about 10% of lending to UK businesses and would need to reapply for authorisation to operate in Britain after it leaves the EU.Companies from European Economic Area countries – EU member states, Iceland, Liechtenstein and Norway – provide about 10% of lending to UK businesses and would need to reapply for authorisation to operate in Britain after it leaves the EU.
In its latest update on potential risks to financial stability, the Bank of England said: “The risk of disruption to wholesale UK banking services appeared to be slightly higher than previously thought, given that a number of EEA firms branching into the UK were not sufficiently focused on addressing this issue.In its latest update on potential risks to financial stability, the Bank of England said: “The risk of disruption to wholesale UK banking services appeared to be slightly higher than previously thought, given that a number of EEA firms branching into the UK were not sufficiently focused on addressing this issue.
More here:More here:
11.13am BST11.13am BST
11:1311:13
KPMG: Construction decline is bad newsKPMG: Construction decline is bad news
Richard Threlfall, head of infrastructure, building and construction at KPMG has a very gloomy take on today’s construction PMI:Richard Threlfall, head of infrastructure, building and construction at KPMG has a very gloomy take on today’s construction PMI:
“This reading is significantly worse than expected and shows that economic uncertainty continues to have a serious impact on the construction industry. Construction is an economic bellwether, so the concern will spread well beyond the sector.“This reading is significantly worse than expected and shows that economic uncertainty continues to have a serious impact on the construction industry. Construction is an economic bellwether, so the concern will spread well beyond the sector.
“There is a clear downturn in commercial construction, which is likely to continue. This is because new orders are dropping off, hitting pipelines. Infrastructure output also appears to be in decline and contractors will be concerned about a lack of new projects.“There is a clear downturn in commercial construction, which is likely to continue. This is because new orders are dropping off, hitting pipelines. Infrastructure output also appears to be in decline and contractors will be concerned about a lack of new projects.
“The one relative bright spot in the data was housebuilding, but even this lost momentum and there are fears that demand will drop off if interest rates rise.”“The one relative bright spot in the data was housebuilding, but even this lost momentum and there are fears that demand will drop off if interest rates rise.”
10.54am BST10.54am BST
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Pound falls after weak construction reportPound falls after weak construction report
The pound has dropped to its lowest level against the US dollar in over two weeks, down 0.2% at $1.325.The pound has dropped to its lowest level against the US dollar in over two weeks, down 0.2% at $1.325.
Sterling has also shed 0.3% against the euro, to €1.128.Sterling has also shed 0.3% against the euro, to €1.128.
U.K. construction PMI unexpectedly dipped below the key 50 threshold in September. Pound dropping to $1.3257U.K. construction PMI unexpectedly dipped below the key 50 threshold in September. Pound dropping to $1.3257
The fall in UK construction activity last month has come as a nasty shock to the City. Traders are concerned that the British economy may be weakening, in the face of Brexit worries and tensions at the heart of the UK government.The fall in UK construction activity last month has come as a nasty shock to the City. Traders are concerned that the British economy may be weakening, in the face of Brexit worries and tensions at the heart of the UK government.
Earlier today, a senior German MEP actually urged Theresa May to sack foreign secretary Boris Johnson following his comments about Brexit.Earlier today, a senior German MEP actually urged Theresa May to sack foreign secretary Boris Johnson following his comments about Brexit.
Manuel Ortiz-Olave, Market Analyst at Monex Europe, says this political tension is not good for sterling.Manuel Ortiz-Olave, Market Analyst at Monex Europe, says this political tension is not good for sterling.
“Today UK construction sector survey data fell into negative territory for the first time in more than a year. The data comes at a terrible time considering how poorly the latest rounds of macro data have performed, and also now that a potential political crisis is brewing in the Tory party.“Today UK construction sector survey data fell into negative territory for the first time in more than a year. The data comes at a terrible time considering how poorly the latest rounds of macro data have performed, and also now that a potential political crisis is brewing in the Tory party.
A combination of last Friday’s downward revisions of GDP data, the increase in trade deficit and consumer debt, coupled with yesterday’s poor manufacturing survey data are now followed by construction pessimism across the board.A combination of last Friday’s downward revisions of GDP data, the increase in trade deficit and consumer debt, coupled with yesterday’s poor manufacturing survey data are now followed by construction pessimism across the board.
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