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UK and Eurozone Economic Recovery Over, Bundesbank Fears Second Wave of Credit Crisis

Economics / Recession 2008 - 2010 Feb 21, 2010 - 08:02 AM GMT

By: Mike_Shedlock

Economics

Best Financial Markets Analysis ArticleRecent data shows the economic slump in the UK and Eurozone is accelerating to the downside at a rapid pace. Let's review a few articles supporting that view.


UK Business lending Falls At Record Pace

Angela Monaghan at the Telegraph reports Lending to British businesses falls at record pace

Lending to British businesses fell by £4.3bn in December, the Bank of England said on Thursday, in a further sign of banks' persistent unwillingness to lend.

Net lending on an annual basis was down 8.1pc. which was the weakest since comparable records began more than a decade ago.

Separate figures from the Bank showed the slowest annual growth in the M4 or broad money supply since February 2000, with growth of 5.1pc. The growth in M4 lending was also at its lowest since December 1994.

UK Mortgage Lending Drops 32% To 10 Year Low

The Telegraph Reports Mortgage lending falls to 10-year low

Total mortgage advances dropped by 32 per cent to £9.1 billion during the month, the lowest level since February 2000, according to the Council of Mortgage Lenders (CML).

This year's drop was larger than usual, and had been caused by people buying lower-value properties rushing to push through their purchase before the stamp duty holiday ended at the beginning of this year.

Brian Murphy, head of lending at Mortgage Advice Bureau, said: "We shouldn't read too much into the January data, which is a result of both seasonal factors and December's stamp duty holiday rush.

Fools Rush In

In sharp contrast to the views Murphey, I advise one should not underestimate the effect of mad fools buying property they cannot afford, at ridiculous prices, just to beat a stamp duty holiday.

It is a serious mistake to confuse tax schemes, and stimulus with genuine demand.

UK Budget Crisis Worse Than Greece

Edmund Conway and James Kirkup at the Telegraph report Britain at risk of worse deficit crisis than Greece.

In surprise news which sent the pound sliding on Thursday, official figures showed that the Government borrowed £4.3 billion last month.

It was the first time since 1993 that the public finances had gone into the red in January – a month in which tax revenues usually push the Exchequer into the black.

Economists said that the scale of the shortfall in the budget could this year mount to above £180 billion – higher than even the Chancellor’s forecast of a record £178 billion.

Such a deficit would, at 12.8 per cent of British gross domestic product, be even greater than the deficit faced in Greece, which is facing a full-scale fiscal crisis and may need to be bailed out by fellow euro nations or the International Monetary Fund.

The poor economic figures came as a major blow for the Chancellor, Alistair Darling, coming a month ahead of the Budget, which he had hoped would provide proof that the economy was finally on the mend.

Questions For Darling

My dear Darling why do you continually confuse recovery with false demand from stimulus efforts?

Are you listening to Krugman, Bernanke or both?

European Credit Markets Flash Hot Warning Signal

Ambrose Evans-Pritchard at the Telegraph is reporting Credit markets flash hottest warning signal since crisis.

European credit markets are flashing the most serious warnings signs in a year as the yields on risker bonds rise sharply and a string of companies cancel share flotations, raising fears that the recovery may falter in coming months.

Jitters over Chinese credit tightening and default risks in Greece and Dubai are causing bond vigilantes to batten down the hatches across the world, bringing the most dramatic credit rally for a century to a shuddering halt.

The Markit iTraxx Crossover index measuring yields on lower-grade debt has jumped by almost 130 basis points since mid-January to 514, while the main index of investment grade bonds has jumped by a third to 93. "This is the biggest move since the financial crisis in early 2009, said Gavan Nolan, Markit's credit analyst. "The index is a leading indicator so it is a warning signal."

Dr Suki Mann, a credit specialist at Societe Generale, said stronger companies should weather any squall but concerns are mounting. "The world has woken up to the real possibility of a double dip. These are nervous times," he said.

BusinessEurope, the EU-wide lobby, warned this week of a "very worrying situation" as it become harder to raise money at a viable cost, if at all. The group called on the European Central Bank to send a "clear signal" about its collateral policy. Fears of tougher ECB rules are a key factor causing market flight from Greek debt.

The sudden halt in bond issues is disturbing since companies have been relying on capital markets to raise money as an alternative to Europe's fragile banks. The ECB said on Tuesday that 42pc of small businesses in the eurozone had reported worsening credit conditions in the second half of last year, despite the emergency stimulus of the authorities.

Conditions appear to be deteriorating. Bank loans to companies contracted at an annual rate of 1.9pc in November and 2.3pc in December. Consumer credit also fell. The Bundesbank fears that disastrous earnings last year will cause scores of German companies to breach loan covenants, triggering a wave of downgrades that further damage German banks and potentially setting off a second wave of the credit crisis.

Party's Over

Unless things quickly reverse, the European corporate bond market is signaling the party is over. Mortgage lending and consumer loans in the UK suggest the same thing.

The European recovery is on its last legs. The global recovery will soon follow. Prepare for an economic relapse. One is highly likely.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2010 Mike Shedlock, All Rights Reserved.


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