Supermarkets and other smaller players are likely to make an aggressive bid to poach retail customers as the bigger banks are broken up.

This month, Virgin Money, one of the leading credit card providers, applied for a licence that will allow it to take bank deposits and offer mortgages. There is speculation that it will bid again for Northern Rock. Tesco and National Australia Bank have also been tipped as possible buyers.

Here we review some of the new kids on the block.

Tesco and Sainsbury’s

Britain’s biggest store chain also offers credit cards, loans and internet savings, and has long promised to expand into mortgages and current accounts.

Its Clubcard Mastercard is the market leader at 0% on purchases for 12 months. Sainsbury’s Finance offers 0% for 10 months.

Tesco also has some of the best online savings rates, with its Internet Saver paying 3% (new customers only) and one of the best-buy personal loans at 8.9%.

Sainsbury’s narrowly beats both with an 8.8% loan and an Online Saver at 3.2%, although that drops to 0.5% if you make more than three withdrawals.

Virgin Money

Virgin’s credit card is the market leader for balance transfers, offering 16 months’ interest free with a 2.98% handling fee.

Andrew Hagger of Moneynet, the comparison site, said: “Virgin’s savings products won’t set the world on fire — it is offering just 0.1% on its easy access account and 0.1% on its cash Isa.”

Virgin provides personal loans with the Co-operative Bank at 8.9% for sums from £7,500 to £14,950.

National Australia Bank

The Australian owner of the Clydesdale and Yorkshire banks is one of the few lenders offering mortgages to first-time buyers with 5% deposits. The rate is 6.99% for three years and there is a £599 fee.

Clydesdale historically had good current account deals but has fallen back. The authorised overdraft rate on its main account, Current Account Plus, is 16.95%.

Two years ago it was 9.64%, one of the lowest on the market. Alliance & Leicester, in comparison, is offering 0% for the first 12 months. The unauthorised overdraft rate at Clydesdale is the highest on the market at 29.99% plus penalty charges. Also, the current account pays no interest on balances in credit.

Small building societies

These are offering some of the best savings deals as they look to boost their balance sheets and fund mortgage lending.

Chesham building society has the market-leading cash Isa at 3.25%, with 180 days’ notice. The rate includes a 0.45 percentage point one-year bonus. The minimum deposit is £500.

West Bromwich offers the top easy-access savings account at 3.35% including a 0.6% one-year bonus (minimum £100 deposit).

(Source: The Sunday Times, 01/11/2009)

Sir Richard Branson believes that the next generation of self-made billionaires will emerge from the corporate wreckage of this recession. In an exclusive interview with The Times, Sir Richard said: “There are a lot of Richard Bransons that will come out of the next three or four years.”

The Virgin founder believes that the depth of this recession and its impact on once-impregnable industries has presented entrepreneurs with their greatest opportunity in generations.

“Fortunes are made out of recessions. A lot of entrepreneurs get going in the economic depths because the barriers to entry are lower,” he said.

Sir Richard highlighted the banking sector as particularly ripe for a shake-up as the established giants of the industry have been humbled, giving new ventures a chance to grab market share as disillusioned consumers look for alternatives.

He wants Virgin to be part of the shake-up in banking, but he also expects as yet unknown companies to seize the opportunities presented by the complete or partial nationalisation of Northern Rock, Bradford & Bingley, RBS and Lloyds Banking Group.

Sir Richard was sharing his thoughts on the state of the economy while flying around the world last week to promote the launch of his newest airline, V Australia. Although he believes that the recession will be prolonged, he is also optimistic about the prospects for the UK’s 4.7million small and medium-sized companies.

“If you are best in your field, then don’t cut back on quality because good companies always survive … I got into business aged 15 and since then I’ve seen four recessions, so I’m quite used to weathering these storms. We are not going to be out of this one any time soon, so people are going to have to dig in and work longer hours to pull us out.”

Sir Richard is concerned that the ambitions of the next generation of entrepreneurs could be scuppered by a lack of financing. Sir Richard is one of Gordon Brown’s business advisers and he has been urging the Prime Minister to make the liquidity crisis the Government’s top priority.

“The PM realises that the most dangerous thing is the liquidity issue,” Sir Richard said. “We cannot allow perfectly decent companies to go to the wall just because they cannot get liquidity. And if your bank is behaving badly, then shout about it because no business can afford to lose that lifeline.”

Sir Richard also urged business leaders not to panic and cut jobs unnecessarily. British companies have been forced to cut costs as sales have slowed and, as a result, unemployment rose to 1.97 million last month, its highest level for 12 years.

Sir Richard has instructed the managers running his various businesses, which include trains, gyms and mobile phones, to find alternatives to job losses wherever possible. He said: “Where companies indicate they may have to cut back and tighten their belts, we have given strict instructions to management to look at job-sharing, part-time work or shorter working weeks to prevent job losses. We want to look at everything first because there is nothing more demoralising than being out of work. That has to be an absolute last resort for any company.”

Sir Richard offered the owners of small and medium-sized companies a piece of advice to help to limit the impact of the recession: “You have to come up with imaginative ways of saving cash, like signing every cheque yourself. You would be surprised how much you can save even in large companies if the boss questions every purchase order that goes out.”

(Source: The Times, 9th March 2009)

The UK is now in recession for the first time since 1991, official government figures have confirmed.

Gross domestic product fell by 1.5% in the last three months of 2008 after a 0.6% drop in the previous quarter.

That means that the widely accepted definition of a recession - two consecutive quarters of falling economic growth - has been met.

It represents the biggest quarter-on-quarter decline since 1980, and a 1.8% fall on the same quarter a year ago.

The worse-than-expected contraction sent sterling to a 24-year low against the dollar, with one pound buying $1.355.

Meanwhile the FTSE 100 index fell almost 2%, below 4,000 points.

‘Broad-based decline’

The figures, from the Office for National Statistics (ONS), showed that manufacturing made the largest contribution to the slowdown, contracting by 4.6% despite hopes that the weak pound would help exporters.

With the exception of agriculture, all elements of the economy shrank from the previous three months, the ONS added.

The fall in GDP was slightly steeper than most analysts had been expecting, said the BBC’s economics editor Stephanie Flanders

“These figures suggest that it’s not going to be done by Christmas,” she said.

The downturn was “broad-based” our economics editor added, saying that the bleak manufacturing data ended “any prospect of this being a white-collar recession that would largely escape manufacturers “.

‘Sad commentary’

Chancellor Alistair Darling said that the figures underlined the scale of the challenges the government faced.

“It’s going to be a difficult year for families in the UK. We need to go about the problem with a sense of purpose,” he said.

Countries across the globe were facing recession, he added, saying that the crisis could be solved “better and quicker” if other governments also acted to stimulate their economies.

Shadow chancellor George Osbourne said the UK faced “the worst recession for a generation”.

“The forecasts that we were given by the chancellor and the prime minister just a few weeks ago now look very, very optimistic - and that’s putting a nice word on it.”

And Liberal Democrat treasury spokesman Vince Cable said the situation was “very serious”.

“It’s a sad commentary on a decade of Labour government that they have succeeded in producing an almost exact replica of the boom-bust cycle we had under the Conservatives.”

‘Grim’

What started as a crisis in the financial sector continues to infect the wider economy.

Unemployment is accelerating sharply, with 1.92 million people now out of work, the housing market remains severely depressed and retail sales are weak.

Even though December’s retail figures were better than expected, growing by 1.6%, this was driven by heavy price-discounting and should be treated “with caution” the ONS said.

Deteriorating picture

GDP is the most commonly used indicator of national income.

It attempts to measure the sum of incomes received by the various wealth-creating sectors of the economy, from manufacturing and retail to agriculture and service industries.

The consensus forecast for 2009 as a whole is now for a 2.1% decline in GDP.

As recently as December, the forecast was for a drop of 1.5%.

This highlights the rapidly deteriorating economic picture over recent weeks, during which a number of the UK’s best known high street retailers, such as Woolworths and Zavvi, have gone into administration.  

(Source: BBC 23/01/2009)

For some companies, the current economic environment will challenge their very survival.  

While for others the downturn offers the chance to extend their lead over the competition.  

“High performing” companies will be looking at ways to strengthen their position and emerge from the downturn stronger and better-placed to win.  

Take stock  

In today’s highly networked economy it is not enough to understand what the effect of the downturn will be on demand for your own products and services.  

It is equally important to understand what is happening to your partners, customers and suppliers.  

A 360 degree assessment of risk provides the starting point for designing your strategy.  

So, choose your response.  

Survival strategies  

Reduce and restructure debt.  

Many companies have been encouraged to take on high levels of debt, and now need to pay this down.  

To preserve cash companies will choose to reduce or cancel dividend payments.  

Although asset sales are not an appealing prospect in the current environment, the reality is that prices could go much lower.  

As one pundit said “Don’t panic! But if you do panic, panic early.” 

Tactical cost reduction will include eliminating discretionary spending, renegotiating purchasing contracts, and reducing exposure to poor payers.  

With equity markets heading downwards, pension fund shortfalls are likely to emerge.  

Companies may need to review policies on defined benefit schemes, retirement ages and levels of company contribution.  

Repositioning strategies  

Streamline and simplify. People are expecting change, and companies should use this opportunity to adjust their business model.  

Eliminating duplication, moving activities to the most economically advantageous location, exploiting economies of scale, and upgrading their performance management systems.  

This is a unique opportunity to access skills and reshape your workforce   

Invest in innovation. Whether a company serves consumers or other businesses, it makes sense to invest now in understanding how purchasing patterns are likely to change and what new needs are emerging.  

Moving early to anticipate and service these needs can help to establish strong customer loyalty and a sound base for future growth.  

Go shopping  

For those in the fortunate position to have excess cash or access to financing, a downturn offers an opportunity to pick up new assets or capabilities at attractive prices.  

Although there are arguments for waiting until asset values fall further, the best assets are likely to come onto the market early.  

Upgrade your human capital. The reality for all Western markets is that there is a growing shortage of critical talent.  

While other companies are laying off staff, this is a unique opportunity to access skills and reshape your workforce to the needs of your future business model.  

Go green. Moving to more sustainable business practices offers the opportunity simultaneously to reduce costs, manage risk and increase appeal to a growing base of socially and environmentally concerned customers.  

Growth strategies  

The underlying trends that have been driving consolidation across a range of industries have not gone away.  

The benefits of scale, broader geographic reach, and access to scarce resources will continue to make large acquisitions an attractive source of future growth.  

Access to debt with which to fund such deals will create an ongoing problem for private equity firms and companies with weaker balance sheets, reducing the competition for attractive assets.  

The largest and most financially secure companies are likely to use this downturn to consolidate their position through substantial acquisitions at attractive prices.

(Source: BBC 10/12/2008)

The UK economy is already in recession, according to Resolution Asset Management, quoting the National Institute of Economic and Social Research’s monthly estimate of quarterly GDP.

The report predicted the UK economy contracted by 0.2 per cent over the three months to the end of August, which signals growth contracted in the third quarter as a whole, Resolution said.

Stuart Thomson, an economist at Resolution, said: “Economic conditions are set to worsen in the fourth quarter, according to leading indicators of mortgage applications, as well as the CBI’s industrial trends and distributive trades surveys.

“Immediate interest rate cuts are required, and given the collapse of the monetary transmission mechanism, these cuts have to be deep.”

Thomson said he believed UK base rates would fall to 3.5 per cent or less by the end of 2009.

Further, he said the financial sector required long-term funding that could only be provided by individual savers or the government.

Respecting the US economy, Thomson said: “With unemployment and risk aversion rising, as well as house prices falling, the relief rally in consumer confidence will translate into a significant improvement in retail sales in the near-term.

“The financial crisis began in the US and will only be ended by the US authorities, but the contagion to the rest of the developed world is clearly evident.”

However, Thomson said he expected the US dollar to remain the strongest global currency over the medium term, but that failure to provide adequate political leadership could cause a correction over the coming months. (Source: FT, 24/09/2008)

Renewed anxiety about the health of the US economy and large companies such as Citigroup and General Motors has led to fears in the credit markets that the worst of the crunch might not be over.

The high-grade derivatives index has widened to 138 basis points after being as low as 90bp in mid-May. The Merrill Lynch US High-Yield Master II index, the benchmark for the high-yield cash market, is showing a spread of more than 700bp over US Treasuries. In March, the high-grade derivatives index reached 193bp, according to Markit, while spreads on cash junk bonds topped 850bp.

“In the last few weeks, hopes that the financial markets had turned the corner have faded,” says Martin Fridson, chief executive of Fridson Investment Advisors, an investment management firm specialising in speculative grade debt.

The mood in the credit markets had improved considerably in the months after the near-collapse of Bear Stearns in March. Wall Street was able to unload some leveraged buy-out debt left over from the boom and write new business. At the same time, the blockbuster bankruptcy or default that investors had feared failed to materialise. However, poor economic data, concerns of further writedowns at the big banks and problems at US carmakers have rattled investors.

“A number of industries are in full-blown recessions: the housing industry, the airline industry, the auto industry and some would say the retail industry and the banking industry,” says Derrick Wulf, a portfolio manager at Dwight Asset Management.

US carmakers, which have billions of dollars of junk-rated debt, have stumbled as surging petrol prices and low demand for sports-utility vehicles hurt sales and cash flow. Long-term bonds of Ford and GM have sold off in the past week and now trade about 55-65 cents on the dollar, which are considered distressed levels. Ford is the largest member of the Merrill index. GM is in the top 10.

The spectre of stagflation does not help. Higher costs, but flat or lower sales and profits hurt a company’s ability to service and repay bonds, especially those companies that are the most hamstrung by debt.

For the rest of the year “there will be spread volatility, a few more negative headlines, a few more investment-grade issuers downgraded to junk and an increase in the default rate”, Mr Wulf says.

Through May, the default rate has doubled, but it is still historically low at 2 per cent. It is expected to surge to 5 per cent by the end of this year and to 6.3 per cent a year from now, according to Moody’s Investor Service.

(FT, 27th June 2008)

The hundreds of thousands of Britons who have moved to Spain in search of a better life have been hit by falling property prices, sometimes with devastating consequences.

When Maxine Crooknorth bought her home on Spain’s south coast two years ago it seemed like the fresh start that she and her young son needed.

Following the death of her partner, she could not afford to get on the property ladder in Britain. And like hundreds of thousands of ex-pats she longed for a new life in the sun.

“I thought it was absolutely brilliant when I came here,” she says sitting on the lush garden terrace of her flat overlooking a golf course and a view down to the sea.

But the dream has turned very sour.

Spanish slowdown

As the Spanish economy has slowed down Maxine has found it impossible to find work to cover her mortgage.

She would like to sell up and go back to Britain. But she bought at the height of the decade-long property boom which made the Spain one of the powerhouse economies of Europe attracting investment and immigrants.

That boom has come to an abrupt halt. As a result Maxine cannot sell her home even at 20% less than she paid.

“There just aren’t the people out there who are buying at the moment,” she says. “Some are but they want a real bargain. Which means that I’m losing an awful lot of money.”

“If I cant sell the place I have looked at renting the property out. But again that’s not really going to cover the mortgage. The other option is just to have to walk away and just to let the bank have it, which means we lose absolutely everything.”

Widespread problem

Maxine is not alone in her predicament. She says that her son has had to say goodbye to seven of his British classmates because their families have found it too tough to stay in Spain. 

And Maxine’s mother, Sarah Smart, is facing losing the home she thought would provide for her retirement.

“We bought our house four years ago when everything was booming and there was plenty of work,” says Sarah. “We bought it as a pension really and things have dried up and we are waiting for it to be repossessed.

“Its been on the market for two years. It started out at 495,000 euros and its now down to 360,000 and still we can’t sell it.”

The pain in Spain

Britons on the Costa del Sol are suffering a measure of the pain which the end of the housing boom is causing across the wider Spanish economy.

Estate agents report that house prices have fallen 30% in many areas; economic growth forecasts have been revised downwards.

Overheating

Mr Solbes says the underlying cause of the slowdown is that the economy became too dependent on a construction sector that got overheated.  have been built, or are still under construction, for which there are not enough buyers.

“We were insisting that the construction of 800,000 a year had no sense that we had to we had to come back to a more normal production of houses, around 500,000 houses and this is what is happening today.”

If what is happening now is a correction then how long will it take for the economy to come out the other side. Mr Solbes hopes the worst of the pain to be over by the end of 2009.

But Spain’s leading housing analysts idealista.com say that in the long run the answer must be diversification so the economy doesn’t have to rely on house building to provide growth.

“In Spain the dream is over,” says the company’s co-founder Fernando Encinar.

“Spain is like Ireland and the UK. We have to face a new situation: what is the source of the economy without the real estate market?”

(BBC, 14/05/2008)

There is a one in three chance of the UK going into a recession over the next two years, according to investment bank Lehman Brothers.  

It says the global financial turmoil is increasing mortgage rates and predicts this will reduce consumer spending.  Lehman Brothers says the Bank of England will be forced to cut rates to 4% or lower to boost the economy.  

The report comes as the latest revised official figures cut the annual rate of UK growth at the end of 2007 to 2.8%.  The annual growth rate in the October to December quarter was trimmed from an earlier estimate of 2.9%, and was the lowest rate since the second quarter of 2006.  

The Office for National Statistics figures showed growth during the fourth quarter remained unrevised at 0.6%. 

 A recession is defined as two consecutive three-month periods where the economy contracts.  

“It has become clear that the banking system - and hence the credit creation process - is under considerable strain,” Lehman Brothers said.  The bank says the credit crisis is now having an impact beyond the financial world as households are finding it more difficult to borrow money to buy a house or remortgage their existing property.  

The investment bank says this will have an impact on the housing market and predicts house prices will fall about 8% by the end of next year.  

“Given the importance of housing wealth for consumer spending, this points to an economic slowdown that could last some time.”  Economist Howard Archer from Global Insight said he believed the UK economy would slow, but not enter a recession, despite consumers tightening their belts in the face of increased mortgage rates, higher food and utility bills.  

“We believe the UK is set for an extended period of markedly below-trend economic growth, although we remain hopeful that it will avoid recession,” Mr Archer said.

Source: BBC 28/03/2008

The threat of a sustained downturn in the housing market grew yesterday after a leading investment bank forecast that property prices would fall for the next two years.

Goldman Sachs said it expected house prices to fall by 5 per cent this year and a further 2 per cent in 2009. The bank had originally predicted a decline of 3 per cent in 2008 and no further change the year after, but became more pessimistic after economic warning signs.

The predictions came as another set of bleak figures showed that first-time buyers were spending the highest proportion of their income on mortgage interest repayments since the recession of the early 1990s.

Leading economists gave warning of a “very real danger” of a sharp housing market correction that could lead to recession, after findings from the Council of Mortgage Lenders (CML) showed that interest on mortgage repayments is eating up more than a fifth of the average disposable income of a new homeowner.

The proportion of income that a first-time buyer spends on mortgage interest was 20.7 per cent in December 2007, compared with 17.9 per cent a year ago. The figure has not reached this level since 1991, before the housing market crashed in 1992.

The CML said that the size of the average home loan also rose, from 3.34 times a typical first-time buyer’s income in December 2006 to 3.38 times at the end of last year.

Experts blamed tighter mortgage lending in the wake of the credit crunch and interest rate increases between August 2006 and August 2007 for the squeeze, dismissing claims that further cuts to the base rate will solve the problem.

Banks and building societies have been cutting back on the amount they are willing to lend, as well as increasing mortgage rates, after last year’s US sub-prime mortgage crisis left them facing chronic funding shortages.

Howard Archer, chief economist at Global Insight, the economic analyst, said: “The data highlights the downward pressures on housing market activity and prices stemming from stretched affordability and tighter lending practices. While the Bank of England’s trimming of interest rates in December and last week will help matters, the overall downward impact on mortgage rates has been limited by a lack of funds for lenders, as well as lenders wanting higher margins due to increased risks.

“There is clearly a very real danger that a sharp housing market correction could occur. Conversely, a sharp housing market correction would increase the risk of recession.”

Goldman blamed tighter credit conditions, falling house price expectations and falling mortgage approvals for its downbeat outlook.

The bank also revised downwards its forecast for the number of property sales it expects in 2008, after weak trading updates from housebuilders showed that forward orders were down by more than 10 per cent. It expects property sales this year to fall by 16 per cent, after a previous forecast of a 10 per cent decline.

The CML yesterday called for the Chancellor to raise the Stamp Duty threshold, after it found that only 40 per cent of first-time buyer properties fell under the current limit of £125,000.

The number of surveyors reporting falls in house prices grew for the sixth consecutive month for the first time since the early 1990s housing crash, new figures show.

A total of 54.7 per cent more chartered surveyors saw lower house prices in January than those who reported rises, the Royal Institution of Chartered Surveyors said.

The figure was up from 49.1 per cent in December and has soared since the 3.1 per cent balance last August, providing more evidence that Britain is experiencing a housing market slow-down.

Last month’s balance is the highest since the 60.1 per cent recorded in November 1992, when the measure grew for five months running.

Government figures released yesterday showed a rise in average house price in December, from £218,662 in November to £219,591.

Squatter’s rights ruling hits home

Mortgage defaulters could face a tougher stance from banks after judges wiped out the debt of a man who had not paid anything towards his arrears for more than 15 years.

Banks have given warning that the Appeal Court ruling in Djabar Babai’s case may force them to take early action against debtors.

The last mortgage payment made by Mr Babai was £40 in January 1993. Because of the bank’s delay in taking action, however, the Appeal Court ruled that he had acquired squatter’s rights over his £200,000 home in Stockport, above, and that NatWest’s security was worthless.

Justin Fenwick, QC, for the bank, said that lending institutions could now be forced to issue possession proceedings “where they would not otherwise have done so”.

Lord Justice Mummery said that it was “an alarming, but unlikely prospect” and said that the practical implications of the decision “are in danger of being exaggerated”.

Mr Babai was made bankrupt in March 1993. The bank took no legal action to enforce its rights.

Lord Justice Mummery said that there should be no difficulty in lenders taking action “within the ample 12-year limitation period”.

(The Times 13/02/2008)

Suppose the gloomsters are right. Suppose house prices do fall significantly. Suppose there really does have to be a significant adjustment to bring residential property values back towards their normal relationship with wages. How do we as a nation best get there?

Take a 20 per cent fall in average home prices from the present £197,000 to £158,000 over three years. That might sound cataclysmic, but it is not a particularly extreme outcome. Such a fall would bring prices back to levels of two years ago and would still leave the ratio between prices and earnings stretched by historic standards. But what would be the best path for such a fall? What would be optimal - or least damaging, anyway - for the wider economy? Is it better that prices should slide gently but continuously for three years? Or would a quicker and deeper plunge in year one, followed by two years of stability or even gently rising prices from a new lower base, be better?

It is a question that hasn’t really been addressed. It is becoming more pressing, though, as the market turns. Figures yesterday from the Royal Institution of Chartered Surveyors show how quickly sentiment is souring. A very significant majority of estate agents are reporting falling prices. The volume of transactions is sliding, buyer inquiries are dwindling, while the stock of properties languishing unsold is rising.

It’s not all doom and gloom. Sound demographics and supply constraints still provide underpinning. Taylor Wimpey said yesterday that while this spring would be subdued, the medium-term outlook was promising.

Conventional wisdom has it that a prolonged and gentle slide in prices would be preferable to a more sudden jolt. The latter would be too much of a shock, making people feel poorer and leading to a collapse in consumer spending, which accounts for two thirds of the economy. A sharp economic slowdown, a recession even, would be inevitable. Yet the former looks no picnic either. A prolonged period of shrinking wealth levels could be more painful still and ultimately lead to more economic damage. Employers might weather a short-lived shock without slashing jobs and pulling capital expenditure plans. Several grinding years of slow or no economic growth, however, could be worse for business confidence overall.

Given the choice between pain today and pain tomorrow, ministers, business leaders and consumers will usually opt for the latter. However, classical economics suggests that the quicker prices adjust to a new equilibrium, the better for efficiency, not to mention the millions of first-time buyers currently priced out of the market. A short, sharp shock might be the lesser of two evils. Just don’t expect estate agents to agree.

(The Times, 16th January 2008)