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Oh what a lovely stock market crisis


Badge Money Blog


Why the gloomy financial headlines when petrol prices are tumbling and mortgage rates dropping?

Patrick Collinson 

The Guardian

Japan, wrestling with its problems
Will we soon be wrestling with a Japanese-style deflation problem? Photograph: Matthias Rietschel/AP

Petrol prices are tumbling. Gas and electricity bills are heading down for the first time in years. Food prices are falling. Mortgage rates are dropping to record lows. Even house prices in London, at least, may be starting to ease off. Yet the financial headlines are the gloomiest for years, with the stock market sliding day by day.

It may be a “crisis” for stock market traders, but many others will say: “Bring it on.”

The cheapest price for petrol in the UK is now 121.9p a litre, down 2p over the last week and more than a tenth off the cost this time last year. Few of the experts expected the oil price to fall below $90 a barrel but, over the past week, it has been plummeting towards $80, so prices at forecourts are only going to get better and better.

On gas and electricity, our big six energy companies will, at some point, have to pass on the fall in the wholesale price of gas. Already the smaller players are promising dual-fuel tariffs of £1,000 a year, compared to the £1,300 the big six try to get away with. There has almost never been a better time to switch.

Meanwhile, mortgage rates are hitting the floor. Today HSBC launches a mortgage priced at just 0.99% – a record low for the bank – and others are chopping rates across the board.

Now take a look at commodity prices. Since May many agricultural products have tumbled on futures markets. Corn is down 35% (in dollar terms) and soybeans 38%, while sugar is down nearly 15%. Food prices are already falling in supermarkets and more cuts are now on the cards.

Yet economists take a dismal view about falling prices. Robert Peston, the BBC’s economics guru, said on Radio 4 this week that inflation at 1.2%, rather than being welcome, is “undershooting” the target set by the authorities.

Economists fret that falling prices, while initially a boon, become a trap for both households and governments. If incomes fall in line with prices, but debts stay the same, then the cost of servicing them becomes ever more unmanageable. That’s a particularly big problem for the UK, where our debt levels are among the highest in the world.

The doom mongers point to Japan, a country gripped by deflation, which over the past two decades has struggled with stagnant growth, hopeless demographics and an eye-watering national debt. Are we at risk of falling into a Japanese debt/deflation spiral?

One fund manager taking a rather different view is Richard Woolnough, who looks after more than £20bn at M&G. He reckons that maybe we fear the deflation bogeyman too much.

“The Japanese economic experience has actually been quite positive in terms of increasing living standards for the average Japanese citizen over the last 25 years,” he says. We shouldn’t just be looking at the GDP figure, but the GDP figure per head.

We are also paralysed by a misreading of what happened during the last bout of deflation in the 1930s. Yes, it was gruesome in Jarrow, but in much of the rest of the country, falling prices were accompanied by fast-rising living standards (British GDP grew by 6.21% in 1934, and 3-5% in the years after).

There are, of course, losers from sliding markets. Pensions and Isa funds have taken a battering – although as they are much less exposed to equities, having shifted heavily into bonds, the impact is less than in previous crashes.

Will the stock market slide continue? The major institutions, while bruised, are confident that a floor will soon be reached.

At some point, shares will start to look startlingly cheap from the dividend point of view. Glaxo is now paying 6%, while HSBC is on 5.1%.

Next April the great pensions revolution begins, and stocks paying a reliable income are going to be among the most attractive things to buy.

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