Global Bankers Institute (GBI) -

Low Interest Rates Mask Problems In The British Economy

Introduction

The continued low interest rates in Britain and the Eurozone are a welcome boost for borrowers struggling to maintain standards of living in a difficult economic climate. With many forecasters predicting that interest rates will remain at their current 0.5% in the United Kingdom up to 2017, the benefits of low mortgage costs are being offset by problems in maintaining income levels for households. Many borrowers are taking advantage of interest-only deals on mortgage lending and this further masks the problem of households struggling to meet their monthly commitments with many low income families paying for essentials such as food with credit or savings.

Unemployment - The Facts

The economy has been surprisingly resilient during the economic downturn in terms of the overall level of unemployment in the British economy. Around two and a half million people over the age of sixteen were classified as unemployed in the quarter to May 2013 according to the Office For National Statistics. The number of people employed in the economy has actually risen in recent periods and there are over half a million recorded vacancies in the job market, the highest since 2008. With good news on unemployment it may be expected that the economy is booming but this is not the case. In real terms, wages have actually declined for three years as people in work suffer wage stagflation caused by businesses holding wage levels year on year and in extreme cases by offering workers a decline in wages in exchange for no redundancies. Statistics show that in real terms, 2012 wages have fallen back to levels last seen in 2003.

Increase In Part Time Working

Many households have either young children or a elderly relatives and for many, full time work is not an option when looking at increasing levels of income. There has been an increase in part-time working and by the end of 2011, a record 7.9 million people were working in a part-time capacity. This has eased the pressure on unemployment figures but also explains why the economy is not pulling out of recession with ease. Even a slight blip in a factor such as the weather can pull Britain back into a statistical downturn. The reality is that many households in Britain are struggling to meet their financial commitments and factors such as part time work, interest-only mortgages and high levels of personal debt have served to keep a depressed economy alive. Fortunately this has avoided the sort of wide scale depression seen globally in the 1930s as the economy has been sufficiently diverse and resilient to the sort of economic shocks that have been seen since 2007.

Impact of Quantitative Easing

A major impact on the current recession has been the program of Quantitative Easing introduced by the Bank of England to address problems associated with a decline in bank lending. The policy has now stabilized in recent months and quantities of money pumped into the economy have not been increased. There has been debate on both sides as to whether the policy is working because the creation of central bank money to purchase bonds will only improve the economy if the major lending banks do not sit on the money supply to boost reserves and that the policy improves credit which in turn raises spending levels to those required to deliver economic growth. Opponents of Quantitative Easing believe it to be a complex measure that cannot deliver long term growth, only inflation and short term benefits to the liquidity of banks who are not supposed to be the beneficiaries of the scheme. Those in favor of the scheme suggest that without the program, the effects of the recession would have been far more widespread and damaging than has been witnessed.

Low Interest Rates

The current trend of low interest rates has created a generation of borrowers that not only expect continued low rates but also have a high dependency upon them in order to secure finance for a home or business purchase. It is believed that up to six hundred thousand borrowers have interest-only mortgages that are due to expire within the next ten years and that one in ten borrowers on such schemes are making no capital contributions outside of the mortgage arrangement. While low interest rates may remain for the foreseeable future it is unlikely that they will continue indefinitely and it remains a possibility that as the economy emerges from the shadow of recession, inflationary pressures will cause interest rates to rise and create a wave of bad debt. Property outside of the London region is suffering from a stagnant market with many areas of the United Kingdom suffering from depressed housing values. Commercial property is under even more pressure, with many influential experts suggesting that some retail areas should be sacrificed for new housing because it is not economic for many empty properties to return to the retail sector. Commercial property owners are operating in a very competitive market and the availability of empty units is lowering returns. With rising energy prices and increasing regulatory pressures, property owners are facing a cost structure difficult to work under. Any business must seek to minimize operational costs by seeking competitive deals in any area of the business that experiences price volatility. By being in control of expenditure, businesses can increase their competitiveness and longevity whereas the companies that are really suffering are the ones that have no alternative plan.

The Future

It is anticipated that pressure on households and businesses will not come from interest rates for the foreseeable future. Banks have tightened their lending criteria so any economic difficulties are likely to arise from historic lending such as long-term interest-only mortgages. Although there are undoubtedly shocks ahead, it is likely that the biggest catalysts for change are behind us. Situations like the RBS crisis should not happen again due to the controls now in place and the changes in lending policies. The increase in the number of online businesses is likely to result in the continued decline of the traditional high street but if the economy reacts as it has in the last five years to the pressures placed on it there is cause for optimism for the future. Businesses will become leaner and more responsive and households are proving more resourceful in the ways they combat income shortages. There will inevitably be a departure from traditional economic patterns but trends such as the rise of part-time working show that changes can help ensure that a worse economic shock, such as high unemployment, will not occur and this gives hope for the future.

Dr. Linda Eagle is President and Founder of Global Bankers Institute (http://www.globalbankersinstitute.com). Linda's understanding of the business requirements of the banking industry and her expertise in human and organizational communication have enabled her to address the most important elements in solving today's business problems: people, technology, and bottom-line results. Prior to co-founding Global Bankers Institute, Linda was President of The Edcomm Group Banker's Academy. Earlier in her career, Linda was Senior Manager at Arthur Andersen & Co - the Big-8 Accounting/Audit/Consulting firm. Linda earned her Ph.D. in business and psychology at Temple University and her MA and BA degrees in Psycholinguistics and Communication Arts at Queens College. Linda has published hundreds of articles on a variety of subjects relating to the banking industry, and she is a frequent presenter at conferences around the world. She has been published in numerous newspapers, banking magazines and journals, including The New York Times, Wall Street Journal, USA Today, American Banker, Bank Technology News, Teller Vision, Collections and Credit Risk, Banking Traditions, Tennessee Banker, Kansas Banker, Illinois Banker, Wisconsin Banker, Wyoming Banker, Mississippi Banker, PA Banker, American Banker, Connecticut Bankers Association (CBA) Commercial Record and many more. Full profile on LinkedIn at http://www.linkedin.com/in/lindaeagle/.