The Economy Today

UK furniture retailer MFI has gone into administration - blaming falling demand for big ticket items, cash-flow problems and the withdrawal of credit.

MFI’s adminitsrators claim to have two expressions of interest from potential buyers, although it is likely that most of the stores will be closed.

MFI has seen sales fall in recent years as it has faced increased competition from businesses such as Ikea and the economic downturn has made trading even harder, as people stopped buying things such as new bathrooms and kitchens.

An even more established name is also on the verge of administration as High Street legend Woolworths has buckled under its debt.

Woolies has been in a desperate position for some time, with loss of market share and poor forward planning over the last few years and the downturn has shown up the stores weakness.

Shares were suspended on the stock exchange today as the firm continued talks aimed at rescuing the business.

As one of Britains oldest store groups, this is a sign that no company is safe in the current climate

Alistair Darling’s pre budget report ( essentially an emergency budget ) gambles that the recession will be all but over by the end of next year, with economic growth returning to positive territory by the third quarter.

I’m not so sure. My predictions have always been that recovery is unlikely until around May 2010, but what do I know? Well, all but one of my predictions over the last year have proven to be correct, which is more than can be said for any of the so called experts.

The chancellor’s bet depends on three risky gambles.
First, the British economy will recover as early as the second half of next year.
Second, the government can deliver a major clampdown on spending with huge efficiency savings.
Third, the electorate will support a significant rise in taxes targeted at the wealthy but which will probably hit those on middle incomes too.

If he is correct, then he will be hailed a hero, Labour will be re-elected and the economy will quickly recover. If he is wrong, the UK will be left with a hangover from this recession for decades - possibly having to call the IMF for help.

Oil prices have fallen to below $50 per Barrel for the first time since 2005, due to continued fears of recession and drop in demand.

US light sweet crude fell to $49.06, while London-traded Brent crude fell to $48.90 a barrel. Compare this to the price in July, when it hit an incredible $147 per barrel.

Crude oil prices had been fuelled by commodities dealers gambling on ever increasing demand for the product. These same dealers however are now abandoning oil, as US stocks of crude oil increased by 1.6 million barrels last week - twice as much as expected.

Investors had been hoping for a continued growth in oil demand from China, but it has been weakening there, as well as in the US.

The price drop is in spite of expectation that OPEC will decide to cut oil production when they meet again on November 29.

In spite of these recent drops in oil value however, in its World Energy Outlook for 2008, the International Energy Agency says the era of cheap oil is over and prices could soon be back up to $100 a barrel, with prices soaring to as high as $200 a barrel by 2030.

Wall Street dropped more than 5% today, dropping to it’s lowest level for more than five years, as US investors continue to panic.

October consumer prices fell by 1% on the month before - the biggest fall in 61 years and reinforces fears of a rapid slowdown.

Economists believe that this rapid fall in consumer prices has given the US central bank the room it needs to cut interest rates to battle the economic downturn and the Fed is expected to cut its key interest rate to 0.5% in December - it cut it’s rates twice in October down to 1%.

The fate of car makers Ford, GM and Chrysler is also still uncertain, as Chief executives from the three firms have been asking for an urgent $25bn (£16.6bn) bail-out package from the government this week as a “bridge” to help them survive.

Car makers were some of the biggest casualties in the markets today, with GM shares down by 15%.

Consumer Index figures show that the UK inflation rate fell in October to 4.5% ( from 5.2% in September) as food prices, transport costs and oil fell.

The Office for National Statistics stated that this was the biggest month - on - month drop in CPI figures for 16 years.

The largest drop came from transport costs, due to the reduction in fuel costs, triggered by the sharp fall in crude oil prices recently.

Meanwhile, The Bank of England believes that inflation could drop to below 1% next year, with the fear that we could actually go in to deflation - i.e. negative inflation. This would be a disaster for British businesses and the larger economy as a whole, so the liklihood is that the Bank of England governors will cut interest rates still further to try and stimulate trade.

So why is deflation such a bad thing? Well, it’s a sign that people aren’t spending. As people cut back on purchases, businesses have to slash their prices to encourage spending, thus cutting their profit margins and having to make cut backs on costs. This means that jobs are likely to be shed, leaving a greater drain on unemployment funds.

A further problem is that investors could see their dividends drop, making them more likely to sell up their shares, causing markets to crash still further.

Lower prices at first sound like a good thing, but lets hope they don’t drop by too much - for all our sakes!

World leaders came together this weekend to discuss the continuing global financial crisis and left with an even stronger resolve to work together in solving the current world recession - well, some of them did.

The meeting brought together not only major industrial powers, but also emerging market countries, such as Argentina and Brazil, fully representing around 85% of the total world economy.

China said that the meeting would help reform international financial institutions and hopes that all countries could continue to co-ordinate, substantially strengthen the financial regulation and take actions to prevent global economic recession.

Meanwhile, British Prime Minister Gordon Brown said the meeting reached important conclusions about trade, financial stability and economic expansion.

The trouble is that the meeting was big on promises, but offered little in the way of decisive action plans. This is little more than an expanded G7, designed to show unity, but afraid of coming up with any real action plans in case a member country is seen to disagree with it!

EU figures show that the Eurozone is now officially in recession, with the economy shrinking by 0.2% in the third quarter. This follows a similar drop of 0.2% in the previous quarter.

The news was expected, with Germany - Europes largest economy - already being in recession. Since Germany is the main driving force of the Eurozone, if they have problems it pretty much guarantees that the whole region will be dragged down with it.

The European Central Bank has dropped its interest rate to 3.25% this month to try and kick - start the failing economy, but I would expect more cuts in the rat to come over the next few months, with the rate eventually dropping as low as 1.5 - 2% before this current crisis starts to abate.

It isgenerally believed that the UK is already in recession, although official figures have yet to be posted.

In spite of the gloomy news, European stock markets ended the week in positive territory.

Sterling continues to be hit hard though, with the value against the Dollar continuing to fall.

This time last year, the Pound was worth over $2 and bargain hunters were dashing across the ‘pond’ to take advantage of cheap goods in New York.

The value has now dropped to only $1.47, with investors believing that the UK will be hit hardest by the recession.