When al-Qaeda attacked the US on the 11th September 2001, known as “Nine-Eleven” did they unwittingly set-off a time bomb in the financial system?

At the time of the disaster the US Federal Reserve dropped interest rates to just 1% in order to prevent their economy from going into a tail-spin. Far from going into a tail-spin the economy, after suffering an initial set-back, continued to grow on the back of easy money and easy lending, at very low rates.

Easy lending has lead to economic melt-down

As a result of this easy lending people spent and spent, pushing up inflation which lead on to several interest rate rises, the intention of which was to slow the economy down. Fuel costs started to rise, with the price of oil rising to a peak of $147 per barrel in July this year, putting yet more pressure on an already fragile economy and pushing up inflation further.

However, despite the early signs of problems and with huge cracks appearing in the US economy, the US Federal Reserve failed to recognise the need to reduce rates at an early stage, as did the rest of the World, leading to the present economic melt down. Governments have been totally blinkered with keeping inflation in-check, without looking at the consequence of previously reducing interest rates to a level that was probably irresponsible. Furthermore, governments have failed to control the irresponsible bank lending policies, where they have been lending to people without income nor jobs, known as NINJA loans (Loans to people with no income, no Job and no assets).

It is important to keep inflation in check however, this blinkered effect has meant that inflation will more than likely disappear, but the problem being that inflation will disappear up the back-side of each major economy. We are now therefore facing, not just a recession, but more than likely a depression, a situation that could have been controlled. I appreciate that with hindsight a problem is easier to judge and make comment on, however, I felt really frustrated some several months ago with the Bank of England sitting there and not reacting or responding to what was unveiling right in front of them. If governments do not learn from this huge mistake we are going to have yet more pain in the future.

World governments need to proceed with caution

World Governments therefore need to be very careful that they do not get caught-out again. We have today seen the UK’s Bank of England reduce rates by an unprecedented amount, which, whilst very welcome and needed, this is not the whole story.

Governments around the world MUST control lending whilst at the same time, not stifling the economy, which is going to be a very tricky balance and difficult road to steer. We do not want to get back to a situation where credit is cheap and in “very easy supply”. If lending is not controlled in a sensible way, credit will continue to build-up and the present financial melt-down will simply be postponed to a future date and be even more painful!

I am not quite sure whether Barack Obama knows what he has got himself into when he chose to become the next US president. Also, the infighting between the UK political parties does not recognise the clear and present danger that the present and the next elected UK government faces. The world needs to work together in dealing with this issue, as they have done so to date, I only hope that the world leaders recognise just how important control over bank lending is and how past “loose control” has lead to a financial catastrophe!

The advice to business owners and to individuals is to be careful and instead of continuing to live on credit, only spend what money you have. Be careful not to fall into the past trap of never ending cheap loans. The false economy of living on debt and re-mortgaging homes is a painful lesson that thousands of people around the globe are beginning to realise.

In a move to stimulate the UK economy the Bank of England has cut interest rates a massive one and a half percent to 3%.

This move was bigger than expected – shock treatment or panic?

This news is certainly welcomed by businesses and property owners across the UK and will hopefully spark some confidence into the economy. This rate is the lowest it has been since May of 1954 and is certainly more than was expected by most experts and economists, but certainly a welcome move.

The cut in interest rates last month from 5% to 4.5% which was inline with other World Bank cuts was not enough where we have seen other central banks, like America slash rates to 1% to help stimulate the US economy. The European Central Bank (ECB) has cut Eurozone interest rates to 3.25% on the same day, representing a half point cut, as the ECB responds to the region’s rapid plunge into recession. There has been speculation that the ECB would have made a larger cut, but it seems they have decided that a larger percentage cut might have appeared to be panic reaction.

Deepening recession

With a deepening recession looming and with companies in receivership and liquidation on the rise together with redundancies increasing the Bank of England need to show commitment to helping industry. There have been widespread calls from industry leaders for a major cut and we will wait to see what this move by the Bank of England will do for confidence in the UK economy.

World stock market volatility continues

We have seen yet more volatility on world stock markets with the Nikki falling by more than 6.5% over night and with the FTSE initially falling by more than 160 points this morning (over 3.5% fall). Also, reality has hit home for Barack Obama in the US, with the Dow Jones falling by 486 points yesterday on the back of his election to be the 44th US president. Barely has the dust settled and the posters for the election run been taken down, when Obama needs to dig in and get to work on sorting out the financial crisis in his country.

The credit crisis is hitting businesses around the globe and at a time when you see World Governments pledging financial support for banks then you know that there is a REAL problem.

No one knows quite how long this crisis is going to last or indeed how bad things will get, but one thing is for sure confidence is a low, property prices are falling, properties are being repossessed and people are being made redundant.

With the picture painted and that part out of the way, I want to reassure my readers that I am not trying to reap doom and gloom here although a reality check is never a bad thing. When times are tough there are certain things that businesses can do to get through and this article is dedicated to that end.

Financial squeeze, relief on the way!

Once the Government funds and guarantees have found their way through the financial system, as the world leaders assure us they will, funds will begin to flow again and the all important business life-blood of CASH will once again be available. What is good news is that interest rates are falling around the world so lending will be cheaper and so long as your figures stack up then there is no reason why banks should not lend to you. The US have dropped rates again last week to 1% and we expect the UK’s Bank of England to follow suit this week, let’s hope the drop is a significant one and not just one quarter of a per cent!

What should small businesses do?

Every business, both large and small will have to revisit business plans, cash flows and budgets, but in particular their forward cashflow projections.

Businesses that are lucky enough to be selling the necessities of life are relatively well positioned at the current time, but even these will be hit to a certain degree and competition will be fierce. So you will still need to keep an eye on budgets and forecasts and on your operating costs. If however, you are a business operating in an industry that is at the whim of discretionary spending patterns, then you will be especially vulnerable right now.

Depending upon your business sector, the effect upon your sales will vary greatly. You might be lucky enough to have a business which benefits from a recession, for example, the low value supermarkets like Lidl are more likely to do well. They will be attracting new customers who are tightening belts and wishing to spend less. However, for the large majority of businesses there will be an effect and this effect needs to be both managed and planned for.

So preparing revised cash flow forecasts and doing a number of “What if” scenarios on varying drops in sales volume is a must. So for example, you might want to see the impact on your business of a 10%, 20% and even a 30% drop might have on the “Bottom Line”. You can then make contingency plans for each of these eventualities and aside from tightening spending budgets, you may find that you will need to visit the redundancy scenario.

Alternatively, you might be able to do some re-structuring within the business and seek additional bank finance to help the business through the following months. Banks like to see businesses plan ahead and if you present to them a well prepared business plan which includes professional cash and profit forecasts, you are more likely to have the bank on your side. Banks do not like last-minute fire fighting scenarios, as this creates “Risk” and does not attract confidence in your business model.

This is a time to look at diversification and for a bit of thinking outside of the box. In other words, if your core business has taken a hit and by increasing your marketing spend does not have enough of an impact, then you should consider adding product/service lines to your range of products and services.

This week Alistair Darling is asking banks to support business customers in these difficult times and not just when times are good. The Chancellor has said that it is vital to support small businesses through the downturn and announcing an extra £4 billion of support.

As a part of the multi-billion pound bailout deal put forward to the UK’s leading banks by the government was a condition that they restore the level of funds available to small businesses to those of 2007 levels.

World interest rates

This week also saw the Chancellor Alistair Darling re-stating his support for the Bank of England, despite criticism that it had been focusing too much on inflation. The Chancellor confirmed that there is no reason to change the Bank’s main goal of keeping inflation to close to the 2% target. The change in words or in the way the message has been sent to the Bank of England is about the discretion over the horizon over which inflation is brought back to this target level.

We watch and wait to see what the Bank of England does next week with interest rates where we see countries around the world have again been cutting their rates. We saw the US Federal Reserve cut interest rates from 1.5% to 1% on Wednesday of this week and Japan cut their rates from 0.5% to 0.3%.

It is of no surprise that the US is cutting interest rates when it was confirmed by figures from the Commerce Department that the US economy shrank at an annualised rate of 0.3% between July and September. Consumer spending, which makes up two-thirds of the US economy, also shrank by 3.1%, which is the first contraction since 1991.

The chance of a interest rate cut in Europe is more likely where inflation for October across the 15 nations that share the euro fell to an annual rate of just 3.2%. The rates presently sit at 3.75% and are expected to be cut by a half-point to 3.25%.

The motor industry

It is good to recognise the good news out there with Volkswagen going against the economic slowdown and reported increased profits. VW’s net profit rose 28% to €1.2 billion ($1.6 billion; £950 million) in the period July to September. Their sales have been boosted by three out of the four BRIC emerging market economies, China, Russia and India, which has off-set lower demand in Europe and the US.

As a contrast to this Japanese carmaker Suzuki issued a profit warning this week and the company blamed the fall in sales down to India, which is one of their key market. The strong yen and higher material costs have not helped their figures where they have said that their net profits will probably fall 25% to 60 billion yen ($612 million; £379 million) in the year to the end of March.

Trouble for pension fund trustees

There is a double whammy for pension funds right now with falling stock markets reducing fund values. But pension scheme trustees are being warned that they should not be too quick to start demanding extra cash from companies at this time which might put too much pressure on those companies at a very difficult time. A longer term view is needed and when the economy is straining with a huge turn-down if pension trustees were to start asking for extra funds might be enough to tip some companies over the edge.

News on the banks front – Barclays bank has secured £7.3 billion of extra investment cash from the Middle East this week. The money is being raised on the whole from state investment funds and royal families of Qatar and Abu Dhabi and unlike some of the other top banks of the UK, Barclays will not be accepting a cash injection from the government. A bank that has been troubled by the world banking crisis HBOS has been approached by a mystery bidder at a time when the UK government has given the green-light for the takeover of the company by Lloyds TSB.

Alitalia appears to be near to a rescue deal being agreed, but as with all the rescue deals posed so far the unions have been putting obstacles in the way. In this latest deal five out of the nine unions are still not backing this new deal, which does seem bizarre because unless the company can secure additional finance, should this deal not go through, the company will go bankrupt. Investment group Cai has said that the deal will still go ahead, despite the lack of agreement with the trade unions.

More on oil price volatile

Oil prices finished the week slightly higher on the week ending at $67.59, as we see results from the oil giants at record levels. For example, US oil group Chevron has seen its latest profits more than double when it reported its third-quarter results to September showing a net profit of $7.89 billion (£4.9 billion), which is up from $3.72 billion for the same period last year.

Exxon Mobil has also made record profits after reporting that it made a profit of $14.83 billion (£8.97 billion) between July and September, representing a rise of 58% on the same period last year. Oil firm Royal Dutch Shell has also reported excellent profits as a result of record oil prices with a jump of 71% in its third-quarter profits to $10.9 billion (£6.6 billion). BP reported earlier that its profits during this same period more than doubled to $10bn.

British Prime Minister Gordon Brown has called for oil price stability and has made a special trip to the Middle East in order to ask the Gulf states to help stabilise prices with the aim to help tackle the global economic crisis. The UK prime minister held talks with Saudi ruler King Abdhullah at the King’s Palace in Riyadh being joined by his Energy Secretary Ed Miliband.

On the jobs front we see more redundancies

American Express has revealed plans to reduce its workforce by around 7,000, representing a cut of about 10%. This together with a freeze on some salaries to reduce costs and a suspension to pay rises for management next year are part of a $1.8 billion (£1.1 billion) cost cutting exercise.

On the housing sector

There has been a slight change on the number of mortgages approvals for house purchases in the UK in September. According to the Bank of England 33,000 home loans were approved in September representing a small rise of 1,000 compared with the record low of the previous month. It is thought that this rise in mortgage approvals is partly due to the government raising the stamp duty threshold to £175,000 in early September.

However, despite the above improvement there is trouble on the repossession front with the number of people losing their homes climbing sharply. The number of repossessions in the second quarter of the year was 11,054, which is up by 71% over the same period last year.

End of the week saw:
Stock exchanges:
FTSE 100: 4,377
DOW: 9,325
S&P: 967
Nikkei: 8,577

Currencies
UK Sterling £ to US Dollar $ 1.61620
UK Sterling £ to Euro € 1.2727
UK Sterling £ to Aus $ 2.44394
US Dollar $ to Euro € 0.787465

Commodities
Crude oil – $67.59
Gold – $725

Gordon Brown has defended his plans to increase government borrowing in order to tackle the economic downturn.

The prime minister told business leaders it was “responsible” for government to boost spending at this time to “speed up economic activity”.

Opposition parties have attacked the current levels of debt, saying Britain is inadequately prepared for recession.

Shadow chancellor George Osborne said government borrowing levels were already “out of control”.

Leading economists have also criticised the government over its spending plans and called for tax cuts instead.

‘Misguided’ strategy

In a letter to a Sunday newspaper, a number of economists warned against an expansion of government spending as a way of stimulating the economy.

They described a focus on public works projects and higher spending as “misguided and discredited”.

The latest quarterly public debt figures hit a record £37.6 billion – higher than the whole of the previous year.

“The responsible course is to borrow now to maintain growth and output” Gordon Brown

Keynesian theory explained

In a speech in London, Mr Brown said fiscal policy would be used to kick-start the economy so as to “help people through difficult times”.

However, in a change to his planned text, Mr Brown declined to say explicitly that borrowing would rise, stating instead that it was “right and responsible” to maintain “investment” at the current time.

But he said that when the economy begins to recover and tax revenues increase, “borrowing” levels as a share of economic output would then come down.

Mr Brown defended government measures to support the faltering economy including help for small businesses and homeowners to stave off the threat of repossessions.

“I can see why people are insecure and worried about their future,” he said.

‘Comprehensive solutions’

Outlining what he said was a “comprehensive” set of policies to help the UK through its current economic problems, he said the economy had the government’s “undivided attention”.

“We have to look at all the areas where we can move the economy forward and restore confidence in the banking and financial system.”

He said he would do “whatever is necessary” to ensure that banks swiftly moved to increase lending to businesses and homebuyers.

Mr Brown’s remarks came against a backdrop of further falls on global stock markets, with the FTSE 100 index of leading shares down nearly 4% in London.

And the Conservatives said that whatever action Labour took now could not hide the mistakes made in the past.

“Gordon Brown is a man with an overdraft not a man with a plan” Shadow chancellor George Osborne

Mr Osborne said higher borrowing was not a “strategy” for economic recovery but an inevitable consequence of the poor state of the public finances.

“What they are talking about is borrowing out of necessity not out of virtue,” he said.

“Government is being forced to borrow. Gordon Brown is a man with an overdraft not a man with a plan.”

Addressing responses to the downturn, Mr Osborne said ministers could look at the “timing” of big infrastructure projects but said spending on public works was not a “solution” to the situation.

For the Lib Dems, Treasury spokesman Vince Cable said it was “necessary” for borrowing to go up in a “period of recession”.

But he added: “What is important is that there is a clear plan from the government as to how the public finances are to be returned to balance.”

Welfare reform

Mr Brown’s speech came on the same day that incapacity benefit is being replaced by a new allowance aimed at getting one million people off benefits.

Mr Brown said welfare reform would be intensified despite the economic climate, saying that it would help people into new jobs.

“The very moment in an economic downturn when we need to invest in human capital is no time to slow down welfare reform,” he said.

Over the weekend, Mr Brown paid a brief visit to Glenrothes in Scotland as part of a by-election campaign and made predictions food and fuel bills would begin to come down next year.

He also hinted falling oil prices could lead to further co-ordinated interest rate cuts.

But while Mr Brown said on Monday that action on monetary policy did have a “role to play”, it was not “up to him” to tell the Bank of England what to do regarding rates.

Mr Osborne said “everyone in the country” wanted to see rates come down but that it must be up to the Bank of England to decide the timing of rate decisions.

News reported by The BBC

Earlier this week I wrote an article to put a positive spin on things, as it seems right now that all we are hearing is bad news with the rest of the week being no different.

I think the story that made me realise just how bad things are out there is the Volvo story where there order book has plunged by 99.7%, where the truck manufacturer has seen lorry orders drop to 115 over the last three months from 41,970 for the same period last year. When I read this I stood up and made note!

Sterling has taken a pounding this week (no pun intended), as it has seen the biggest falls since 1992 as it has fallen to 1.59129 at the end of the week representing an 8% drop. This will be good news for exporters to the US, as prices of goods leaving the UK will be cheaper and could lead to more sales of British goods, but it is bad news for business and holiday travellers alike.

There is good news on the horizon as we would expect interest rate cuts, I can’t believe the Bank of England has not cut them sooner. It is difficult to understand quite why we still have interest rates at three times that of the US, where the base rate is just 1.5%. Signs are out there that the banks are expecting cuts though, when I received in the post this week an offer from The Bristol & West Building Society of a fixed rate for three years of 5.59% for one of my buy to let mortgages.

Nils Pratley of the Guardian is talking about “deep cuts in interest rates”, let’s hope he is right, especially when we see that retail sales for John Lewis, considered to be the barometer for the state of the high street, have fallen by 7.6%.

Microsoft is bucking the trend, as is The Royal Mail when the US software giant has posted profits and sales figures well above analysts’ expectations. Microsoft made a $4.37 billion profit during the first three months of its financial year, which is up from $4.29bn a year ago and turnover rose 9% to $15.06 billion. The Royal Mail has doubled its operating profits to £177m in the first half of 2008/09 from a year ago, helped by cost cuts and greater efficiency, not bad when the average daily postbag is now 79 million items, which is five million fewer letters than two years ago.

We have another week of big falls in oil prices, this despite the oil cartel Opec cutting output by 1.5 million barrels a day. The price of oil closed at $64.65 per barrel having started the week at $71.75, this is a fall of nearly 10%. Which of course is great news for consumers, petrol prices and provides more downward pressure on inflation. These falls have lead to a price war breaking out between the UK’s top four supermarkets as Asda, Sainsbury’s, Tesco and Morrisons announced cheaper petrol. Asda and Sainsbury’s said they would slash their petrol prices to as low as 94.9p a litre – about time too when you consider this latest fall in oil price represents a fall of nearly 56%.

It’s good to see Brazil doing well, which is one of the BRIC economies (Brazil, Russia, Indian and China, the worlds fastest growing economies). Although the Brazilian stock market, the Bovespa in São Paulo, has recently fallen by around 20%, it is still up by around 5% from the level it was at last year. This compares to the UK’s FTSE 100 which is down around 16.5% over the same period. 10 bourses have bucked the downturn, which is good to see some good news on some of the World Stock markets.

End of the week saw:
Stock exchanges:
FTSE 100: 3,883
DOW: 8,379
S&P: 877
Nikkei: 7,649

Currencies
UK Sterling £ to US Dollar $ 1.59129
UK Sterling £ to Euro € 1.25299
UK Sterling £ to Aus $ 2.56787
US Dollar $ to Euro € 0.787405

Commodities
Crude oil – $64.65
Gold – $736.00

Charles Bean, deputy governor of the Bank of England, took the prize for the most apocalyptic vision yesterday. The economic slump is still in its early stages, he said, as a result of “possibly the largest financial crisis of its kind in human history”.

This is quite a statement from a senior Bank official and surely means that the monetary policy committee (MPC) – finally – has got the message about the severity of the coming recession. Get ready for deep cuts in interest rates. In the US they have been cut to 1.5%. In Britain, where the economic crisis suddenly looks more serious than in the US, rates still stand at 4.5%. The two figures should now close, rapidly.

Many of us watched in disbelief during the summer as the MPC declined to cut interest rates. Before this month’s half-point reduction, taken in coordination with all the world’s major central banks, the last cut in UK rates was in April. That is another era in the context of the financial crisis. As recently as August, one member, Tim Besley, actually voted for a quarter-point increase in rates.

The mistake made by most members of the MPC – David Blanchflower is the honourable exception – was to be dazzled by the prospect of inflation at 5%. That level, reached this month, will soon look a quirk. The price of every major commodity has been falling since the early summer (and a lot earlier in the case of wheat and many foodstuffs) and the greater danger now is deflation.

Read those MPC minutes from the summer again and you see members were worried that weakening the pound by cutting rates would import more inflation.

Well, sterling has weakened anyway, falling 10% against the dollar this week. The financial markets are now expecting – and, in a sense, forcing – the rate cuts that should have come earlier.

Failure to cut rates soon might weaken sterling further: it would be taken as sign that the UK was still not accepting reality. So will it be a half-point cut or a full-point on November 6? The City’s economists are divided. Either way, 3% by Christmas is a possibility.

Inflation hawks will regard the idea as heresy. The problem is not the price of credit but its availability, they argue. It is true that one effect of cutting rates could be a serious bout of inflation two years from now. But that is tomorrow’s problem, to be addressed at the time.

The immediate task is to limit the duration and depth of the recession. That means helping borrowers and consumers to repay their debts. A dose of wage inflation, or tax cuts for the low-paid, could be precisely what the economy needs. It is unfair on savers, but, sadly, this won’t be the first or last time that the thrifty have been tricked.

Simon Ward, economist at fund management group New Star, has crunched the numbers on the “average” path of recessions using data from 1974-75, 1979-81 and 1990-91. If the current recession follows that path, we would see contraction of 2%-2.5% between the second quarters of 2008 and 2009. The economy would then move sideways for a year, recover in the second quarter of 2010 and finally regain its peak level of output in 2011.

The danger is that even these gloomy forecasts prove too optimistic.

The difference with this recession is that it is complicated by the banking crisis and the disruption in the flow of credit to small businesses.

Much is riding on the banks’ behaviour. Appealing to their sense of public duty is one way. Cutting interest rates is more likely to be effective.

>News reported by The Guardian, Nils Pratley

The news reported on a daily basis is the news that hits the headlines and in most cases is the most dramatic of the moment, otherwise it would not be news and not worth reporting, right?

Well I have been thinking and for each news article I read I can normally try to see an upside despite the doom and gloom that is being offered. I think that this is important right now, as I have been very conscious of all the news reported lately on here, as being bad news, gloomy reports and all very much depressing stuff!

So I wanted to write a positive spin on some of the items around today to see what my readers of this blog think, so here goes:

Recession to hit the world!

This is a bad thing and no one likes a recession, well you could argue some do though. In a recession the World Banks usually put interest rates down a point or two, so if you are a home owner or more likely the readers of this blog, you are a property investor, then reduced interest rates is great news. Certainly, with my property portfolio, the 1/2 point cut was very welcome indeed on those of my mortgages that are not on a fixed rate – so bring on more cuts please Mr Bank of England! I am sure that all property owners will welcome this relief right now.

During a recession commodities prices are affected and in particular the one that is in most peoples minds is oil prices. Oil prices have dipped to around $66 per barrel this week, having been up at $147 only a few months ago. The price of oil has risen a bit today on the back of growing expectations that oil producers’ cartel Opec will cut output.

“The decision should not leave the producer countries in the situation where they will be joining the group of countries which are already suffering from the financial crisis.” Opec president Chakib Khelil

The value of US light crude recovered today by $1.63 to reach $68.38 a barrel on the back of this news. The likelihood is such that, despite Opec’s cut in production, the price of oil could drop as low as $60 per barrel – probably never thought possible back in July this year when the price was up at the $147 level!

However, the good news on this front is that we are already seeing reductions in pump prices, albeit slower than wished! This is not only good news for motorists, leaving them more money to spend in our businesses, but it also means that transport costs and especially for haulage firms, is cut too. This will all feed though the economy, thereby reducing inflation and leading to further cuts in bank base rates – Yet more good news for property investors!

Property crash, this must be bad news!

Not necessarily, where property prices are crashing, this leaves the market open for those investors looking to buy a bargain. This might seem a little mean, but it is a fact of life that there will always be winners, as well as losers in any market situation. So the good news here is not if you are a property seller, but if you are looking to buy.

The news papers report the bad news about repossessions, however, this does create a business opportunity to snap up a bargain or two from the banks when these types of property come to the auctions. Don’t get me wrong, I do feel sorry for the unfortunate people in the horrible position of having their home repossessed.

The travel and airline industry hit bad by crisis and oil prices

It is a little bit more difficult for me to see a good side to these stories, as we see US Airways and Air France-KLM have both reported heavy losses on their share prices due to the current economic slowdown. American airline US Airways has lost a staggering $865 million (£537 million) in it’s third quarter with shares falling over 14% to $7.28 (£4.50).

The European airline Air France-KLM’s shares have also taken a hammering on the markets when they plunged by as much as 11% to $15.55 (£9.59).

In these cases, the brave might say that the share prices have bottomed out and you can therefore pick-up these shares a low price. One has to be careful though when you look at what was happening with Italian airline Alitalia, as things can and do get worse so you could lose your money. However, after 9/11 in the US, share prices in all the major airlines tumbled, providing a fantastic buying opportunity for the brave and the prices recovered thereafter, making a lot of investors very rich indeed!

The other benefit these problems will have is that travel companies and airlines alike, will need to further streamline their businesses to make themselves more competitive. These streamlining measures will cut costs and thereby allow these companies to pass-on cost cuts to travellers. The airlines will have to put offers out there to encourage people to fly with them, which encourages competition, as all the airlines will need to remain competitive! Thereby, reducing prices further, because another benefit of the recession and the lower oil prices noted above is that airline fuel will be cheaper. Virgin Atlantic was one of the first airlines to cut it’s fuel surcharge on its flights, so a direct benefit to business travellers and to holiday makers alike.

Retail sales in September see a fall

Retail sales in the UK are now growing at their slowest annual rate we have seen in 2 1/2 years, as reported by the Office for National Statistics (ONS). The report shows that high street sales fell by 0.4% in September, taking annual growth to 1.8%, from 3.3% a month earlier. An example is that DSG International, which owns Currys and PC World, reported a 7% drop in sales in the half year to 18 October, which is partly due to lower margins.

This is obviously bad news for retailers themselves and the business owners concerned, however, for the consumer this is good news. The retailers will be holding more “Sales” and reducing prices to encourage people to buy – look at what Currys and PC World have said, they are selling at lower margins, which means they are having to cut the retail prices to encourage selling.

The good news is that we are seeing more of a slow-down, which will point more towards a further cut in interest rates by the Bank of England next time around, let’s hope so!

The UK’s official bank rate could fall below 2% as the government struggles to avoid a recession.

If so that would be the lowest it has been since the Bank of England was founded in 1694.

Economist Roger Bootle predicts a fall to 3.5% by Christmas and 2.5% or 2% by spring and lower if “things get really bad”.

He also says that inflation will “plummet” next year and could even fall to zero or below.

Dramatic prediction

“We are going to see some dramatic falls in interest rates.

“The low point in recent years was 3.5% and we weren’t in anything like the pickle we are now.

“But it has to get an awful lot lower – 2% is the all time low for Bank rate and I suspect we’ll get to something like that, but if things get really bad why can’t they get lower?”

“If the medicine is not that effective you have to use a bigger dose” Roger Bootle

He predicts a cut at the November meeting of the Bank of England’s Monetary Policy Committee and expects another at the December meeting too.

“I would certainly see half a point off by Christmas and maybe 1% off.

“And if the news continues to be grim we’ll see further falls in the early months of next year.

“If the medicine is not that effective you have to use a bigger dose – so it wouldn’t surprise me if we see 2.5% or 2% by the spring.”

Income fears

Such rates could slash the incomes of many retired people who live partly on the interest on their savings.

One Money Box listener wrote to the programme:

“If investment rates fall as is now predicted, I am one of possibly hundreds of thousands of pensioners, who will find their returns from building societies reduced by as much as three quarters.

“We rely on the current level of interest to make ends meet, and large numbers will be faced with being unable to meet living costs, particularly fuel and council tax.”

“It wouldn’t take much to push it below the zero line” Roger Bootle

Roger Bootle understands the fears of price rises, but says falling interest rates will not boost inflation.

“Inflation has been very high, but it is set to plummet.

“Oil is less than half what it was at the peak, wheat prices are a third what they were.

“The commodity price shock is going into reverse.

“And we surely all believe recession is hitting the UK economy – that will also tend to reduce prices, so those together will bring inflation tumbling down.

“It is possible that the downturn will be even more serious and it wouldn’t take much to push it below the zero line.”

If that happened it would be the first time the UK had experienced deflation since the end of the Great Depression in 1933.

News reported by The BBC

The gains ealier this week on the FTSE 100 have since been wipped out over yesterday and the falls continue today to a present level of 3,944 representing a fall so far today of 3.3%.

The Dow Jones fell by 733 points overnight from a rally to 9,311 earlier in the week to close at 8,578 representing a 7.9% fall as the economic gloom deepened. Fears continue over the recent financial rescue plans over concerns that the measures taken will not be enough to avert a deep and prolonged global recession. Even some of the safe havens that a traditionally soughtin tough times, like gold and Japan’s yen currency, made way to losses.

Mining companies have been worst hit being the stocks having the greatest exposure to the present slowdown. Metal and oil producers have lost heavily for a second day as crude prices slid further on commodity exchanges – crude price stands at a low of $72 a barrel.

Switzerland injects cash into UBS

Another bank has been hit hard by the sub-prime losses leading Switzerland to take steps to strengthen its largest bank UBS. Switzerland is the latest country to unveil a banking rescue plan and will raise 6 billion Swiss francs ($5.3 billion) from the Swiss government.

Credit crunch hits US banking profits

Banking profits in the US have been hit hard by the credit crisis although this is not by as much as Wall Street had feared. JP Morgan saw third quarter profits fall to $527 million (£302 million) which represents an 84% drop. America’s Wells Fargo bank also saw its third quarter profits fall to $1.64 billion (£940 million), which represents a 23% drop.

European leaders are seeking bank reform

European leaders are calling for major reforms to the global banking system when they meet to discuss an EU rescue plan. The UK’s Prime Minister, Gordon Brown, said the International Monetary Fund (IMF) should be “rebuilt” in order to help regulate the world’s financial systems where the Germans and French added that the financial markets should be better supervised. It is interesting how the focus from the original proposed summit to target climate change has been changed.

Nationwide has refused to pass on full rate cut

The Nationwide has announced that it will not be following other leading mortgage lenders in passing on the full half-point cut in the Bank of England base rate to it’s borrowers on its standard variable rate. The only customers that will benefit from the full 1/2 per cent cut will be the Nationwide tracker mortgage.