More than 3 million will be out of work next year, CBI warns

Britain faces a toxic combination of a deep and prolonged recession, deflation and soaring unemployment this year and next, the CBI warns today.

It says that the country's economic output will fall by 3.3 per cent this year - the sharpest annual contraction since the Second World War - and will all but stagnate in 2010. The recession will force companies to axe hundreds of thousands more jobs and unemployment will top three million next year.

The CBI Director-General attacked the Government for failing to head off the worst of the downturn. Richard Lambert criticised the attempt to stimulate consumer spending by cutting VAT from 17.5 per cent to 15 per cent. He said: “Was a VAT cut the best way to spend £12billion in the face of the onset of the most severe recession in decades? No.”

Mr Lambert said that the Government needed to draw up a timetable to outline when its multibillion-pound package of measures, announced last month, would come into force. “Business needs the Government to hurry up,” he added.

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The CBI said that consumer spending would plummet by 2.7 per cent this year, reversing the 1.7 per cent rise last year, as workers, worried about falling house prices and deteriorating employment prospects, conserved their cash.

Businesses grappling with the slump in demand and difficulties in securing funding from banks were taking drastic action to cut costs, the CBI said. As a result, unemployment was likely to climb by more than a million to peak at 3.04million between April and June next year - the highest since 1986. The CBI said that dole queues would nearly double to 2.36million by the end of 2010.

Unemployment levels reached nearly two million between October and December, official figures show. The sharp deterioration in the global economy will compound Britain's problems because businesses cannot rely on trade with other countries.

The CBI said that GDP would drop by between 1 and 1.5 per cent in the first three months of this year and fall by a further 0.75 per cent in the next quarter. Although the CBI said that the pace of decline would ease later this year, it predicted there would be no quarterly growth until April next year. Even then, the recovery will be so shallow that GDP will stagnate at 0 per cent on an annual basis.

Despite the dismal figures, the CBI said that the peak-to-trough drop in GDP would still be more modest than that of the recession of the 1980s.

The CBI's outlook is even more gloomy than that of the International Monetary Fund (IMF), which said last month that Britain would be harder hit than any other advanced nation, shrinking by 2.8 per cent this year.

The Government estimates that GDP will drop by between 0.75 per cent and 1.25 per cent this year.

A separate survey out today shows that 39 per cent of British manufacturers are finding it more difficult to get finance now than they did three months ago. The Markit Credit Conditions survey shows that one in six factories said that this holds them back.

In a further blow for savers, the CBI said it expected interest rates to remain low as the Bank of England battled falling inflation. But it said that consumer prices would continue to drop, pushing the country into deflation for several months this year and keeping inflation at well below the Bank of England's 2 per cent target until 2011. Pay or pensions linked to the alternative RPI measure of inflation could suffer from a dip in the rate as low as minus 4.4 per cent this year, the CBI said.

Government finances will also be hit hard as tax revenue falls. The CBI expects that the Treasury's tax receipts will have slid by £60billion by 2010, while its borrowing will nearly double this year to £148 billion and rise to nearly £170 billion next year.

Only one part of the Government's stimulus package, including a scheme to guarantee banks' toxic loans to help them to lend, has started. The Bank of England began pumping up to £50billion into British companies in return for short-term IOUs on Friday.

Britain’s bankers plumb new depths

Jon Moulton, the private equity chief, warned a City lunch this week that he feared serious civil unrest. There was, he said, a 25 per cent chance of one of the 15 member countries of the eurozone pulling out of the currency club. That, he said, would be a catastrophic shock leading to a “far greater financial crisis” than the current one.

The mind boggles at a financial crisis far worse than the current one. Is such a thing possible? Even with this one, it may already be too late to prevent social unrest, especially in Britain, which is tipped to be one of the worst-hit countries economically.

The spectacle of bankers continuing to award themselves bonuses while taking taxpayer support is feeding an extraordinary public rage and a fierce sense of injustice. With 40,000 people losing their jobs each month, it is a recipe for trouble, come the traditional rioting months of the summer.

It won’t be bankers being lynched, of course, but small shopkeepers in inner-city areas having their windows smashed and their stock looted. The only surprise is there haven’t already been antibanker demonstrations in Threadneedle Street – secretly cheered on by 99 per cent of Middle England.

The seething sense of unfairness is almost palpable. The view that a small elite not only caused the crisis, but continues to profit at the expense of everyone else, is near universal. Gordon Brown’s promise of no rewards for failure in state-supported banks is looking ever more threadbare. We now know that Peter Cummings, the highest-paid person on the HBOS board, headed a division responsible for £7 billion of losses last year, yet he was still given a reported £660,000 payoff when he left in early January clutching his £6 million pension pot.

The suggestion by Lord Myners, the City minister, that some bankers simply have no sense of the broader society around them is getting harder to refute. To be preparing to pay out billions of pounds in discretionary bonuses over the next few weeks suggests an ignorance of the public mood and a single-mindedness bordering on sociopathic.

All this may be a bit of a side show for Sir Victor Blank and Eric Daniels, chairman and chief executive, respectively, as they try to stop the water slopping over the gunwales of the combined Lloyds/HBOS. Yesterday’s bombshell was grave for the bank, dispiriting for taxpayers and damaging to the chief executive. The timing is acutely awkward, coming just 48 hours after he appeared before the Commons Treasury Select Committee. MPs might have pressed him rather harder if they had known what was just around the corner.

The £10 billion loss at HBOS is humiliating enough, but the admission that the losses are £1.6 billion worse than when shareholders were asked to approve the deal in November is worse. Lloyds got HBOS to sweeten the terms twice. With hindsight it still wasn’t enough. Mr Daniels admitted to Parliament this week that he was not able to conduct as much due diligence as in a normal deal. His shareholders and UK taxpayers are now paying a heavy price for that failure.

The 32 per cent slump in the Lloyds share price yesterday speaks volumes about the market’s fears. Although Lloyds insists its balance sheet is still strong, the need for additional capital will be back on the agenda. If HBOS’s corporate loans could have soured by £1.6 billion in the space of just a month, its surplus capital cushion could quickly be wiped out. That could lead to full nationalisation eventually.

Lloyds says that one of the reasons for the losses was the more conservative methodology it uses for gauging potential loan losses. That comes close to suggesting the old HBOS board was somewhat less than conservative itself. If the reputation of the old guard at HBOS, including Gordon Brown’s former favourite Sir James Crosby, is capable of sinking any lower in the public estimation, it will now be doing so.

IMF chief Dominique Strauss-Kahn warns second wave of countries will require bail-out

A "second wave" of countries will fall victim to the economic crisis and face being bailed out by the International Monetary Fund, its chief warned at the G7 summit in Rome.

Edmund Conway in Rome

Dominique Strauss-Kahn's warning comes amid growing concern that at some point in the next year a major economy could have to seek support from the Fund. Mr Strauss-Kahn, who was yesterday attending the Group of Seven leading finance ministers' meeting in Rome, said: "I expect a second wave of countries to come knocking."

The IMF managing director also said the rich world was now in the midst of a "deep recession". It came as the G7 pledged to avoid slipping into protectionism and repeating the same political and economic mistakes as were made in the 1930s. Ministers also pledged to do more to support their banking systems, sparking speculation that a number of countries, including Germany and France, will unveil new bail-outs and possibly set up "bad banks" as they scramble to fight the crisis.

But with some countries' economies effectively dwarfed by the size of their banking sector and its financial liabilities, there are fears they could fall victim to balance of payments and currency crises, much as Iceland did before receiving emergency assistance from the IMF last year.

Some have speculated that the UK may have to seek IMF support if capital markets become frightened of the size of its foreign financial liabilities, which increasingly appear to have become supported by the state. But there are a swathe of Eastern European countries which appear particularly vulnerable and may need IMF support.

With the Fund's warchest expected to run dry later this year, the Japanese confirmed in Rome that they would supply an extra $200bn of capital to the Washington-based institution.

Mr Strauss-Kahn, who warned recently that his resources could run dry within six months, said: "This is the largest loan ever made in the history of humanity.

"The biggest concrete result of this summit is the loan by the Japanese... now I will continue with the objective of doubling the Fund's resources."

He added that it was now essential for countries to support their banking sectors.

BMW to cut 850 jobs at Oxford Mini plant

BMW, the German vehicle maker, today announced plans to lay off 850 weekend agency staff at its Mini factory in Cowley, near Oxford, as the slowdown in demand for cars worsens.

Agency workers leaving Cowley this morning expressed their anger at being given just one hour’s notice of losing their job. The company made the announcements just as the staff affected were finishing their shift.

"It’s a disgrace. I feel as though I’ve been used. We should have been given one month’s notice, not one hour," said one worker.

John Cunningham, who has worked at the factory for more than two years, said he felt betrayed. "We’ve been given a week’s pay for an enforced week off, which I suppose is a week’s notice. I don’t know what’s going to happen to me and my family. It’s very scary."

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Union sources said workers booed and threw apples and oranges at managers after being told the news.

"Sacking an entire shift like this, and targeting agency workers who have no rights to redundancy pay, is blatant opportunism on BMW’s part and nothing short of scandalous," said Tony Woodley, the joint leader of the Unite union.

"BMW’s parent company couldn’t attempt this in Germany because it would be illegal to do so. It is a disgrace, therefore, that workers in this country can be so casually thrown to the dole."

The number of production days at the factory will be reduced from seven to five once the job cuts come into force on March 2, and permanent staff deployed on weekend shifts will be redeployed to the week.

BMW also announced today that it will close down production at the plant for one week in response to plunging demand for new cars.

The company said in a statement: "While Mini has been weathering the economic downturn, it is not immune from the challenges of the current situation.

"Against this backdrop the company felt that a review of its shift patterns was necessary. This decision has not been taken lightly. The plant’s union representatives have, of course, been involved in the discussions."

A spokeswoman said that there were "no current plans" to make permanent staff redundant. The plant employs 940 agency staff alongside 4,300 permanent workers.

BMW's factories at Swindon and Hams Hall near Birmingham, which supply parts to Cowley, will not be affected by the cuts, the company said.

The job cuts at BMW follow 220 jobs cut last week by Bentley, the luxury carmaker, around 10 per cent of its workforce. Ford axed 850 jobs earlier this month. Last month Nissan cut 1,200 jobs in Britain and Jaguar Land Rover cut 450.

Toyota and Vauxhall, which is owned by General Motors, are also considering reducing their British workforces and Honda enforced a four-month lay-off at its Swindon plant.

Derek Simpson, joint leader of Unite, said the job losses showed how deeply the recession was now affecting the motor industry, given that BMW was a "hugely profitable" firm and Cowley was an efficient factory.

He said: "There is a huge onus on the Government to take drastic action to support the motor industry and to encourage people to buy cars. The banks will also have to start making credit available again or this is going to lead to disaster."

Malcolm Harbour, a Conservative MEP for the West Midlands and a former director of the Rover car company, said: "The British Government is not tackling the underlying cause of manufacturers’ woes: the lack of demand for new vehicles.

"Getting loans to car and commercial vehicle customers now is essential, but all the Government has done so far is set up a committee. The Government should be seeking to make the vehicles already on the forecourts more attractive to hesitant consumers."

In January, Lord Mandelson, the Business Secretary, outlined a £2.3 billion aid plan for the motor industry that will guarantee loans to car and components companies.

Gordon Brown’s spokesman said that the job losses at Cowley were very disappointing news. "All I can say really is the Government is doing and will do all that we can to help those affected.”

The Mini celebrates its 50th anniversary in August of this year. Cowley was one of the factories that produced the original 848cc model designed by Sir Alec Issigonis.

After production of the old design finally ceased in 2000 it was replaced by a new, more powerful version with a 1.4 litre engine which has also proved hugely successful, especially abroad, with 80 per cent of the factory’s output sold for export. But worldwide sales were down by 35 per cent last month and by a similar amount in the UK, in line with a slump which hit all car manufacturers.

Cowley started building the new Mini in 2001 and the factory has a capacity to produce 260,000 models a year.

Failure to save East Europe will lead to worldwide meltdown

The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point.

By Ambrose Evans-Pritchard

If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.

Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.

"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.

The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East.

Mr Pröll tried to drum up support for his rescue package from EU finance ministers in Brussels last week. The idea was scotched by Germany's Peer Steinbrück. Not our problem, he said. We'll see about that.

Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.

"This is the largest run on a currency in history," said Mr Jen.

In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.

They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).

Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.

Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.

Under a "Taylor Rule" analysis, the European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics – a German-Dutch veto – and the Maastricht Treaty.

But I digress. It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system.

Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.

The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.

Its $16bn rescue of Ukraine has unravelled. The country – facing a 12pc contraction in GDP after the collapse of steel prices – is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5pc in the fourth quarter. Protesters have smashed the treasury and stormed parliament.

"This is much worse than the East Asia crisis in the 1990s," said Lars Christensen, at Danske Bank.

"There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU."

Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4pc in the fourth quarter.

If Deutsche Bank is correct, the economy will have shrunk by nearly 9pc before the end of this year. This is the sort of level that stokes popular revolt.

The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc – big change), or rescue Austria from its Habsburg adventurism.

So we watch and wait as the lethal brush fires move closer.

If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?

• More on Ambrose Evans-Pritchard

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• Europe on the brink of currency crisis meltdown

• EU refuses bail-out package despite crisis fears

• Euro at risk from Europe's economic storm

New World Order

By Justin Fox Thursday, Feb. 05, 2009

In recent weeks, the world has been politely standing by and watching how things play out with the fiscal stimulus and latest bank-bailout plans in Washington. Yes, there's been some grumbling overseas about "buy American" provisions in the stimulus bill, but for the most part, officials elsewhere don't want to step on the toes of a new President to whom they are favorably disposed. They also don't want to endanger legislation that they hope will help jump-start the global economy.

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Just wait a couple of months, though. Politicians from Beijing to Berlin to Brasília see the current crisis as the product of a messed-up global financial infrastructure dominated by the U.S., and they will soon be pushing for big changes--whether Americans like them or not.

All this will begin to gel on April 2, when the newish international organization known as the G-20--the leaders of 19 of the world's biggest national economies, plus the European Union--meets in London. An unofficial meeting has already taken place, at the World Economic Forum in Davos, Switzerland, where G-20 officials (with the conspicuous exception of those from the U.S.) made speeches, conversed in the halls and gave a sense of the direction in which the world outside the U.S. wants to head. (Read TIME's special report on Davos 2009.)

The global discussion of the financial crisis is strikingly different from the one in the U.S. Here there's still something of a debate over whether the mess is the result of too much government interference in the housing market or too little government regulation of financial markets. In the rest of the world, that's no debate: inadequate and inconsistent financial regulation is uniformly blamed. What's more, a consensus seems to have emerged among the world's finance ministers and central-bank bosses that the chief underlying cause of the crisis was an unbalanced and out-of-control system of global capital flows in which some big-spender countries (namely the U.S.) ran up huge debts while big savers (China and India, for example) hoarded surpluses.

On the regulatory front, the path to a new global approach is pretty clear. Last spring the leaders of the G-7, a club of wealthy nations, agreed to create a "college of supervisors" to more closely coordinate regulation of multinational banks. The Group of Thirty, an influential organization of current and former central bankers and financial regulators, recommended in January that "systematically significant" financial institutions (those that are too big to fail) be identified in advance and subjected to higher capital requirements and tougher regulation. (See who's to blame for the financial crisis.)

Yet regulators around the world were already jointly setting bank-capital standards before the current crisis hit. A lot of good that did us. So there is also much talk about the need for a new architecture--"a new Bretton Woods" was a phrase that echoed around Davos--to rein in global financial flows.

Bretton Woods is the mountain resort in New Hampshire where in 1944 the Allied nations met--with the U.S. calling almost all the shots--to plan a postwar financial system. The Bretton Woods creations included the International Monetary Fund (IMF), the World Bank and a quarter-century of fixed exchange rates built around a U.S. dollar that was linked to gold. The fixed exchange rates and gold standard unraveled in the 1970s, and ever since we've had a system in which the IMF occasionally steps in to help countries in currency crises (usually imposing harsh terms in the process) but exercises no real control over the global financial system.

After the emerging-market currency collapses of the late 1990s, in which IMF aid wasn't much help, the lesson that emerging economies such as China and India took was that they needed to build up gigantic reserves of U.S. dollars to protect their currencies. To build those reserves, they ran big trade surpluses, which were in turn enabled mainly by record trade deficits in the U.S., which were in turn enabled by massive borrowing from around the world. It was an extremely unbalanced financial ballet, and it has now come crashing to the ground.

In the view of many outside the U.S. (and some within), the only way to limit such excesses is through a bigger, more powerful IMF that can act as a central bank to the world--and knock heads when needed. While everybody agrees that this new IMF needs to be less dominated by the U.S. and Western Europe, things get controversial as soon as you go past voting rights. Should capital flows be restricted? Should there be limits on trade deficits and surpluses? Should the IMF be able to order around even the U.S.? If the answer to any of these questions is yes, global capitalism will have entered a new and dramatically less freewheeling era.

Financial Crisis Called Top Security Threat to U.S.

By Walter Pincus and Joby Warrick

Washington Post Staff Writers
Friday, February 13, 2009; Page A14

Director of National Intelligence Dennis C. Blair told Congress yesterday that instability in countries around the world caused by the current global economic crisis, rather than terrorism, is the primary near-term security threat to the United States.

"Roughly a quarter of the countries in the world have already experienced low-level instability such as government changes because of the current slowdown," Blair told the Senate Select Committee on Intelligence, delivering the first annual threat assessment in six years in which terrorism was not presented as the primary danger to this country.

Making his first appearance before the panel as President Obama's top intelligence adviser, Blair said the most immediate fallout from the worldwide economic decline for the United States will be "allies and friends not being able to fully meet their defense and humanitarian obligations." He also saw the prospect of possible refugee flows from the Caribbean to the United States and a questioning of American economic and financial leadership in the world.

But Blair also raised the specter of the "high levels of violent extremism" in the turmoil of the 1920s and 1930s along with "regime-threatening instability" if the economic crisis persists over a one-to-two-year period.

In answer to a question about whether he was shifting assets to cover the financial downturn, Blair said that by leading off with the economic situation he "was trying to act as your intelligence officer today, telling you what I thought the Senate ought to be caring about." He said he was not refocusing the intelligence community's basic collection and analytic work from traditional concerns such as terrorism, Afghanistan, Pakistan, Iran, North Korea, Russia and China.

In fact, during the nearly two-hour hearing, Blair took lawmakers on a virtual tour of every other major and minor security threat, from terrorism and cyber-attacks to the country's evolving relations with Russia and China.

Discussing terrorism, Blair emphasized the progress being made against al-Qaeda. "We have seen notable progress in Muslim opinion turning against terrorist groups such as al-Qaeda" as more religious leaders question terrorists' use of brutal tactics against fellow Muslims. He said that "al-Qaeda today is less capable and effective than it was a year ago" based on the pressure the U.S., Pakistan and others put on Osama bin Laden and his core leadership in Pakistan's tribal areas and the decline of al-Qaeda in Iraq. He also reported that while no major country faces the risk of collapse at the hands of any terrorist groups, "Pakistan and Afghanistan have to work hard to repulse a still serious threat" to their governments.

Despite these successes, Blair said al-Qaeda and its affiliates and allies "remain dangerous and adaptive enemies," and the threat continues that they could inspire or orchestrate an attack on the United States or Europe. He told the committee there is still concern that al-Qaeda could inspire some homegrown terrorists inside the United States. He added that if al-Qaeda is forced out of the Pakistan tribal areas, it will have difficulty supporting the Taliban in Afghanistan. He said bin Laden could relocate. For example, he said, al-Qaeda elements in Yemen now pose a new threat to Saudi Arabia, whose own efforts have been successful in killing or capturing most al-Qaeda senior leaders in that country.

Blair delivered a blunt assessment of Iran and its weapons programs, saying that it is possible that Tehran could develop a nuclear weapon as early as next year, if the country's leaders choose to do so. But he also suggested that Iran could be kept off the nuclear path with the right combination of diplomacy and economic pressure.

"Iran is clearly developing all the components of a deliverable nuclear weapons program," he said, but "whether they take it all the way to nuclear weapons depends a great deal on their internal decisions."

Blair described Iraq as increasingly stable, with terrorist attacks on the wane and al-Qaeda losing followers and influence. But he warned that recent progress could be undermined by tribal disputes, corruption and foreign support for militia groups.

Echoing recent statements by U.S. military commanders, he gave a grim portrayal of security in Afghanistan, where Taliban insurgents have shown new aggressiveness while the government continues to struggle with rampant corruption and an extensive drug trade. In neighboring Pakistan, an intensified campaign against terrorists has failed to subdue multiple insurgencies or quell growing radicalism in many parts of the country.