The most startling number in this week’s news was the extra £750 million spent on petrol by Tesco customers in the six months to August, compared with the same period last year. This wasn’t some Clarkson-esque craze for seeing off the downturn blues by taking the motor for a spin, but the inflationary impact of higher oil prices and fuel duties. As Tesco chief executive Phil Clarke observed, ‘That’s £750 million that could be spent in shops or paying off credit cards.’ Not surprisingly, like-for-like sales in his stores were at their most dismal since the recession of 1992.
But at Morrisons and Sainsbury’s, the year-to-date numbers are up a fraction. Clarke’s opposite number at Sainsbury’s, Justin King, says his customers are managing tight cash flows by changing their shopping patterns but that overall there’s ‘much too much doom and gloom’. Maybe he’s right, and maybe there’s a clue in this as to how the Chancellor could make a difference at modest cost to the Treasury. Petrol pump prices have been steady through the summer and the oil-price trend has been downwards since April — from well above $120 per barrel to around $105. That’s still high relative to the stagnant state of the economy, but the end of the Libyan conflict gives hope of further easing. And food prices are also on the turn: the UN Food and Agriculture Organisation’s index of food commodities fell to 225 last month having peaked at 238 in February. Add a supermarket discount war to these underlying shifts, and consumers might just start to feel more cheerful — at least that’s what retail analysts are predicting.
But it is the painful price of fuel (a penalty of more than £500 per year for the average family, according to UBS analyst Mike Tattersall, quoted in the FT) that ought to catch George Osborne’s eye as he drafts his autumn statement. Some supermarkets have cut the price of unleaded to 130p, of which 58p is fuel duty and 22p is VAT. Slashing the fuel duty to 50p for a year (producing a pump price of 120p or better) would boost the consumer economy as well as helping a lot of small businesses. The cost to the Treasury would rapidly be made up in VAT on other discretionary spending. The green lobby wouldn’t like it, but needs must.
What’s the point of ratings agencies? Moody’s, one of the three big names in an increasingly discredited game alongside Standard & Poor’s and Fitch, has just awarded downgrades to 12 UK banks and mortgage lenders including — despite their partial state ownership — RBS and Lloyds. ‘Does that mean Lloyds is about to go bust with my pennies in it?’ one friend rang me to ask, while Sir John Vickers, chairman of the independent commission on banking reform, felt obliged to explain that in his view the downgrades were ‘entirely benign’ and a recognition of progress towards ‘getting the taxpayer off the hook’ in relation to any future bank collapses.
‘Benign’ is an odd word to apply to a move which makes life more difficult for the banks without telling the rest of us anything new or useful. The agency’s logic is that if the regime proposed by Vickers means no more taxpayer bailouts, then all banks are inherently riskier for bond investors. Fair enough, but on the basis of very pessimistic modelling of house price falls to come, the major building societies have been pushed into higher-risk categories not far above ‘junk bond’ status. That includes Nationwide, which not only came through the credit crunch entirely unshaken but has strengthened its balance sheet since, showing a ‘Core Tier 1’ capital ratio of 12.5 per cent — Vickers says 10 per cent is sufficient for UK retail banks, and international rules emanating from Basel start at 7 per cent.
As of April, Nationwide also had £123 billion of its £150 billion of loans to customers funded by savers’ deposits, making it by any normal measure a very safe bank indeed. But Moody’s has marked it down from ‘Aa3’ grade to ‘A2’, which will increase Nationwide’s cost of wholesale funding and feed through in costs to its customers. Unhelpful and misleading, you might think, and you’d probably be right.
The ratings agencies disgraced themselves in the boom, fuelling the flames by awarding top AAA ratings to all manner of toxic mortgage-backed paper — for which they collected handsome fees. They’ve been struggling since to re-establish credibility. Nervous investors and lazy headline-writers still give weight to their opinions, which means the agencies’ interventions add to short-term market volatility, but many professionals no longer take them seriously. In August, following the stand-off between the White House and Congress over debt limits, Standard & Poor’s marked US sovereign debt down from AAA to AA+ — which looked like a deserved reprimand until S&P had to admit a $2 trillion error in its deficit-reduction calculations and its own former chief economist, David Wyss, said: ‘The credit agencies don’t know any more about government budgets than the guy in the street who is reading the newspaper.’ If there were ratings for ratings agencies, they’d all be junk by now.
Tim Price writes on page 32 about the impact of quantitative easing and an extended period of near-zero interest rates on private pension-holders and those who live on their savings. In a rather tetchy interview with Stephanie Flanders of the BBC after the QE announcement, the Bank of England governor Sir Mervyn King expressed his ‘enormous sympathy’ for savers who did nothing to cause the crash but are bearing far more than their fair share of the cost of repairing the damage. If the choice is between recession and mass unemployment or decent savings and annuity rates, he didn’t quite say, then unfortunately it’s the old folk who’ll have to suffer. Combine that factor with increasing longevity and the inadequacies of the NHS and the care sector — and long after this economic crisis is officially over, we’ll still be counting its elderly victims.