Newsletter 5
Market Update - Economic Forecasts
"My other piece of advice, Copperfield," said Mr. Micawber, "you know. Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.."
A touch dramatic perhaps but we are now starting to see the effects of an extended period of unprecedented credit availability and consumer spending. In this article I will look at how the leading economists from the main banks have frankly been useless in their economic predictions.
We all look to these experts opinions and may use this as the basis for future behaviour, in assessing our commitments and affordability. It is increasingly clear that in 2009 and beyond, you will primarily need to 'look after your own house'.
James Carter, Principal at Independent James
Only a few months ago, the Bank of England was concerned with high oil and commodity prices and the inflationary pressures this brings. There has been a 180 degree shift as we now prepare to face a period of deflationary pressures. How can the forecasts and predictions change so dramatically in such a short space of time?
You will no longer be hearing house price predictions from Nationwide or HBOS (we will have to wait and see if our other ij regular, Bank of Ireland follow suit). They announced in December that for differing reasons they would not be making these forecasts, with HBOS citing their LTSB merger and Nationwide suggesting it would be “irresponsible” at this time. I would suggest that it is because they were so spectacularly wrong in the recent past. The bottom of a falling market is much more difficult to call than the top.
The following table looks at the economic forecasts given in December 2007 for the year ahead (2008) and the actual outcomes:
| 2008 Predictions |
House Prices | Actual | UK Growth | Actual | Bank Base Rate | Actual |
| HBOS | 0% | -16.2% | +2% | + 0.3% | 5% | 2% |
| Nationwide | 0% | -13.9% | +1.7% | + 0.3% | 5% | 2% |
| Bank of Ireland | + 4% | -14% | + 2.2% | + 0.3% | 5.25% | 2% |
Of the other forecasts that stand out as ‘Fails!’ in 2008, Goldman Sachs oil price predictions. In May 2008 it predicted that over the course of the next 2 years the average price per barrel would be in the $150 - $200 range. However, in December it changed this forecast to an average of $45 per barrel in 2009. I’m not sure if Michael Fish is the head of their forecasting department!
However, players of the ‘blame game’ are rarely winners. We should not become bitter as everyone expected the good times to slow or come to an end at some time. We can spend a lot of time criticising the experts for this going wrong or not doing that correctly but we all need to focus on how we can move forward.
As you can see, all 3 of these major lenders were way out with their predictions. Hindsight is a wonderfully accurate tool but what does this mean for us in future? More than ever this hammers home the cases of affordability and attitude to risk when choosing your mortgage arrangements.
If you have doubts about the long term affordability of your mortgage and you have a cautious attitude to risk then you should choose a fixed rate on a repayment basis. The more adventurous amongst you and those with excess affordability may choose to look at the option of a rate that moves in line with interest rates on an investment backed basis.
Regardless of your choice of interest rate, I would urge everybody to ensure that they keep their own house in order in 2009. You need to make every effort to reduce your indebtedness. You may for instance, decide to keep your mortgage payments at previous levels if they have fallen with base rate, thus overpaying your loan and reducing the overall interest charged. In most cases, you should firstly repay any existing credit cards or loans with high interest rates. Alternatively, you may wish to save the surplus to build up an emergency fund. It is also recommended that you maintain savings of 3 times your monthly salary in an easily accessible form.
I do believe that we need to be positive and look at the position we find ourselves in terms of the overall extremely high quality of life and living standards the majority of us enjoy and have come to expect.
Will we see a return to Austerity Britain? Well I certainly think that in 2009 we will all need to maximize earnings and minimize outgoings wherever possible. In the 2 case studies in this Newsletter we look at both how to protect your earnings and reducing your outgoings.
If you have any queries regarding your current mortgage or protection arrangements, please do not hesitate to Contact Us.