From John Stepek, across the river from the City
Dear Steven Parker,
![John Stepek]()
Recession denial. Everybody's at it.
Even if there's a downturn in the UK, it seems that not a single company will actually be affected by it. This week, we've had restaurant chains, travel companies and of course mortgage lenders claiming that regardless of what happens to the wider economy, they'll be just fine.
Their products are not luxuries, but essentials. Consumers won't go without, regardless of how bad it gets. It's different this time.
That's what they always say…
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The travel industry is now immune to economic downturns, we were told earlier this week. Who told us this? Why, the chief executive of travel firm Thomas Cook.
Manny Fontenla-Novoa said that British people consider holidays an essential rather than a luxury. They'll cling to their annual holiday for dear life, ditching home improvements, eating out and booze if necessary. Oh yes, said Mr Fontenla-Novoa – we will survive.
Why eating out isn't so essential after all
Now it appears that British consumers also cannot live without a regular fix of tasty Italian peasant food and a nice cup of frothy coffee-flavoured milk. Upmarket Italian café chain Carluccio's claimed yesterday that it would be fine in a downturn because its customers only spend an average of £12 a head. What's £12 after all?
Well, actually, it's quite a lot if you're trying to cut back. Let's say that's £12 a head a week. That's £24 a couple. That's £100 a month. If you're looking for something to sacrifice when the mortgage payments go up, or your petrol bill starts to look scary, I'd say that lunch at Carluccio's looks like a very easy win for your budget.
The latest news on house prices is grim too. Nationwide reported that prices fell in January – it's the first time since 1995 that prices have fallen for three months running. House prices have now fallen 0.3% in the past three months, with the annual rate of growth sliding to 4.2%.
Recession denial was in evidence here too. Martin Gahbauer, Nationwide economist, apparently "noted tentative signs in surveys that demand could recover, as would-be buyers who had been priced out of the market returned to look for bargains." 'Tentative signs'? Talk about clutching at straws. I suspect that prices will have to fall quite a bit further before anyone thinks they're at bargain levels – or can get the finance to buy them.
Of course, it's understandable why these companies try to spin things in a positive light. They can't just turn around and say: "Well, we're a business that relies on consumer spending, and consumers look like they won't have much to spend for the next few years. Frankly, things don't look that great."
The reality of recession
But there's also still a genuine sense that no one can quite believe that anything really bad will happen. Sure, banks are having trouble and the housing market is on the slide (more on that in a moment), but when banks are talking about losing literally billions of pounds and are still up and running, it doesn't seem real. And as for housing – well, house prices needed to cool off a bit, and it's probably a buying opportunity, isn't it?
The trouble is, a recession is anything but 'business as usual'. Let's turn to the US for a moment, which is running a few months ahead of us on this one. Yesterday, Starbucks, purveyors of the ultimate 'essential luxury' item – overpriced coffee – saw its shares take a pounding as its fourth-quarter results disappointed. Traffic to its branches fell for the second quarter in a row, and the group announced plans to cut down on openings, and shut 100 underperforming branches over the next nine months.
Meanwhile, jobless claims in the US soared by 69,000 last week, the highest weekly jump since after Hurricane Katrina in September 2005. Part of the rise was put down to data collection problems due to a public holiday. Robert Brusca of FAO Economics told MarketWatch that claims now indicate a "border-line recession warning."
As we've been saying for a while, jobs are the last thing to go in the economy – but when they do, that's when the real misery begins. As Tom Stevenson puts it in The Telegraph: "If companies start shedding labour, Thomas Cook and Tui will be the first to know about it."
Turning to the wider markets…
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UK stocks down 9% in January
London's FTSE 100 index recovered from an earlier 147-point deficit to end the day 42 points higher overall, at 5,879. Over January as a whole, the index was down 577 points, or 8.9%. For a full market report, see: London market close (http://www.moneyweek.com/file/41619/london-close-footsie-erases-150-point-deficit.html)
Elsewhere in Europe, the Paris CAC-40 closed 3 points lower, at 4,869. SocGen - which rose 1.7% on confirmation that peer BNP Paribas is considering a takeover - was a rare riser in the financial sector as its peers fell sharply. Over in Frankfurt, the DAX-30 closed 23 points lower, at 6,851.
On Wall Street, stocks rallied yesterday, with the Dow Jones adding 207 points to end the day at 12,650. The S&P 500 was 22 points higher, at 1,378. And the tech-rich Nasdaq added 40 points to end the day at 2,389. However, the major indices had all notched up heavy losses over the month as a whole: the S&P 500 was down 6.3%, the Dow Jones was down 4.6% and the Nasdaq had lost 9.9% - the worst performance since January 2002 for the latter two indices.
In Asia, the Japanese Nikkei fell 95 points to end the day at 13,497, with Sony weighing heavily on the benchmark index. However, the Hang Seng rallied 667 points to 24,123.
Platinum hovers near all-time high
Crude oil had fallen to $91.09 this morning. Brent spot was at $92.18 in London.
Precious metal platinum hit a new record high of $1,741 yesterday, and was trading at $1,735 this morning. Spot gold had risen to $926.65, up from $923.80 in New York late last night. And silver was at $16.90, just off yesterday's 27-year high of $17.00.
In the currency markets, the pound was trading at 1.9902 against the dollar and 1.3382 against the euro. And the dollar was at 0.6723 against the euro and 106.49 against the Japanese yen.
And in London this morning, UK pub owner Greene King announced that revenue had fallen slightly over the fiscal year so far as the smoking ban and falling consumer confidence kept customers away. The company said that it expects the rest of the year to be 'challenging'.
Our recommended articles for today...
Gold: it's about far more than power cuts
- Gold has been hitting new record highs on almost a daily basis of late. Many have put this down to temporary production problems in South Africa. Click here to find out why Merryn Somerset Webb things that this is just noise distracting from an underlying upwards trend: Gold: it's about far more than power cuts (http://www.moneyweek.com/file/41518/gold-its-about-far-more-than-power-cuts.html)
Can Bernanke beat the Bear?
- Ben Bernanke is tackling the bear head-on in the belief that central banks can protect the economy from the side effects of a stock market collapse. Can his - or indeed any - policies succeed? Find out how well loose monetary policy has worked in the past here: Can Bernanke bear the Bear? (http://www.moneyweek.com/file/41582/can-bernanke-beat-the-bear.html)
Until Monday,
