October 15, 2008
The worst of the financial crisis might just be over after an international rescue effort. But the bailout won't prevent the global economic storm already beginning to make itself felt on these shores. Sarah Arnott reports
House prices
Once the darling of credit-fuelled prosperity, the housing market was one of the first to feel the effects of the crunch, suffering as house price falls trashed buyers' confidence.
Predictions of how far the housing market will fall get more pessimistic every day. Already down by more than 12 per cent on a year ago, house prices could fall by a further 5 to 10 per cent, David Miles, a former government housing adviser, told the Treasury Select Committee yesterday.
Mr Miles, an economist who is now a professor of finance at Imperial College Business School, in London, told MPs that the property market would stabilise, but not until house prices had lost 20 per cent of their value from the peak of the market last summer.
The falls are certainly continuing, according to the Department for Communities and Local Government, which produces authoritative, but quite historical, figures.
In August, the department said, prices were down 3.4 per cent, and the declines were speeding up. Over the three months to May, prices were down just 0.2 per cent. In the quarter to August, they dropped 2.4 per cent.
Still, such declines may not be entirely bad news, because over-inflated property values are so closely linked to the current economic instability.
Construction
Annual results from Bellway yesterday suggest there is no sign of an end to the crisis in the sector, a knock-on effect of the house sales decline. The housebuilder sold 6,556 homes, with an average price of £169,700, in its financial year, compared with 2007's record high of 7,638 homes, averaging £173,000. The result? A 29 per cent drop in pre-tax profits.
It will get worse before it gets better, Bellway added. By the end of September, the company's forward sales were 49 per cent below their 2007 level, with Manchester, Yorkshire and the Midlands proving particularly difficult markets. Price cuts of up to 25 per cent are being offered to lure in reluctant buyers, and persuade mortgage-shy banks to lend, but the model is not sustainable for a long period and the group is predicting a further fall in profits for the current financial year.
The real shock is that such ominous results come from a housebuilder that came into the slowdown with a strong order book and low gearing.
"Bellway's figures speak volumes about the state of the sector," Mark Hughes, an analyst at Panmure Gordon, said. "They would look like a disaster in a normal market, but relative to what is happening now they are a good performance."
Groceries
Supermarkets generally outperform in a downturn, because food is an essential item rather than a luxury on which people cut back. Still, many supermarkets have begun to feel the pinch as hard-up consumers turn to budget grocers to help cut food bills.
Aldi is the biggest winner so far, according to the latest TNS Worldpanel market share figures. Published yesterday, they show Aldi's sales are up 22.1 per cent over the past three months, giving it a 3 per cent market share. Lidl, Iceland and Farm Foods are also doing well, while Morrisons and Asda are holding their own.
However, growth at Tesco and Sainsbury's, perceived as more expensive, is lagging the market. And at the top end of the sector, Waitrose, John Lewis's groceries arm, is really struggling, with a 3.8 per cent fall in share.
Chocolate
Budget groceries is one thing, but cutting back on chocolate is quite another, and sweet sales are supposed to be resilient when economic problems put the kybosh on other luxury spending. People like small treats to cheer them up in difficult times, the theory goes.
Performance at Cadbury looks positive so far. Yesterday's third-quarter statement reports revenues up by 11 per cent in the UK, thanks to the relaunch of the Wispa bar, and up by 6 per cent overall, with the help of a new range of Dairy Milk products.
However, underneath that sugar coating, the chocolate company says it is not possible to gauge with any certainty what the effect of the economic situation on consumer behaviour will be, and it is cutting 580 jobs, as part of a worldwide streamlining plan.
Clothing
Fashion retailers have had a grim time since the summer, with shoppers reining in non-essential spending.
JJB, the troubled sportswear chain buffeted by rumours of imminent collapse, admitted yesterday that it is discussing the sale of "non-core assets", which are understood to be its 61 Original Shoe Company shops and 24 Qube stores. The deal has an unconfirmed price tag of £20m, and is thought to be with a trade rival. JJB has had a particularly torrid time. Last month, the group reported a £9.7m half-year loss, and the auditors warned of a "significant doubt" that it could continue as a going concern. The company lost a quarter of its market capitalisation last week when it emerged that Coface, an insurance company, withdrew its coverage from the company's suppliers. It was also caught out by the collapse of the Icelandic bank Kaupthing.
Top-end luxury brands are not immune. Burberry's half-year revenues rose by 13 per cent to £539m, some way ahead of analysts' forecasts. But like-for-like sales growth slowed to 2.6 per cent in the second quarter, compared with 4.5 per cent in the first and a whopping 6 per cent in the second half of last year. Spain, hit hard by slowing consumer confidence linked to a shaky housing sector, is a "difficult market" for the company and sales dropped by 20 per cent.
Pubs and restaurants
One man's loss is another's gain, as Whitbread knows well. It revealed a 24 per cent increase in profits for the first half yesterday, with a particularly strong performance from its Premier Inn budget hotel chain. It has benefited from companies reducing their budgets for business travellers.
Alan Parker, the company's chief executive, reckons Whitbread's coffee shop chain, Costa, will also prove resilient – offering chocolate-style treats – though he admits he is nervous about Christmas and the New Year.
Still, any good news from the leisure sector is unlikely to last, according to analysts. The biggest single factor that could affect consumers' leisure spending is unemployment, so the full effect of a recession would take longer to be felt. "We don't yet see a material slowdown affecting the industry because people are still in jobs," Matthew Gerard, at Investec, said. "But that will come under pressure towards Christmas and we expect trading to start to tail off across the sector."
The traditional league of companies hit hardest by a slowdown is that four-star hotels suffer worst, followed by restaurants, non-luxury hotels, tour operators, pubs, gambling and, finally, bus and rail operators, Mr Gerard says.
Sex
And now for the good news. As the financial world crumbles, economic output turns negative, and consumers stop eating out and going to the pub – there is always sex. SSL, the manufacturer of Durex condoms, says it is confident of a 10 per cent rise in annual profits. International expansion has helped, but there may be another reason for the success. If everyone is too skint to do anything else, an early night might be just the thing.
constructionin crisis
luxurygoodsslipping
REtailersunderpressure
Even sweet makers are worried
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