Not exactly unexpected news this morning, but for the first time since 1997 the UK unemployment rate has risen above two million.

According to the National Statistics Website, the number of jobs in December 2008 was 31.32 million, down 203,000 on the quarter and down 284,000 over the year. This is the largest quarterly fall in jobs since September 1992. Most sectors have shown falls in jobs over the quarter with the largest fall occurring in finance and business services (down 102,000).

They also reported that the unemployment rate was 6.5 per cent for the three months to January 2009, up 0.5 over the previous quarter and up 1.3 over the year. The number of unemployed people increased by 165,000 over the quarter and by 421,000 over the year, to reach 2.03 million. The unemployment level and rate have not been higher since 1997.

Separate reports released by the British Chambers of Commerce (BCC) and CBI have both predicted that unemployment will rise above around three million in the later parts of 2009 and into 2010.

Although the news is not really a massive surprise for any of us, it is a clear indication of the struggle the country is facing with respect to keeping business flowing and people in jobs.

But, we do have to look at the bigger picture in this report. In December 2008, employment was standing around 31.32 million, which is still the large majority of this countries work force in employment. When you look at the figures, they do look worrying and deeply disturbing, but when you take into account that even if the unemployment rate does rise to 3 million next year, will still leave, at this moment in time, 30 million people still in work. Or, out of 100% of the nation’s work force, 92% should still be employed in 2010, if current reports are anything to go by.

When you compare this to other countries, the UK is actually doing quite well, despite recent indications that the UK is going to be hit the hardest by the current recession and economy downfall.

Anybody currently facing redundancy, going through it or looking for a new job after suffering it will of course see things very differently, and quite rightly so, but in the grand scheme of things, well over 20 million people out of a work force of around 25 million people will still be bringing home a wage packet for the rest of the year and beyond.

And with news of various supermarkets and fast food outlets looking to create thousands of jobs within the next few years, we should see a few more of the unemployed being able to find a job, albeit depending in your area and skill set.

The US Dollar has weakened overnight following reports the US government may nationalise major US banks as a result of the financial crisis. Sterling has staged a minor rally following the publication of retail sales figures for January and EU leaders met over the weekend to discuss economic strategy ahead of the G20 summit in London in April.

Pound Sterling - UK markets

Sterling has strengthened overnight, climbing to 1.45 against the US Dollar and gaining 1.6% on the Yen amid news that the US government may nationalise major banks. The news fuelled a round of risk aversion but this failed to strengthen the traditional safe havens and Sterling gained on its major currency partners overnight.

PM Brown has announced a £14 billion credit injection into Northern Rock and the bank is to start lending again, expected to take on £5 billion worth of mortgages this year. This is a reversal of earlier government decisions and comes tempered with the warning that banks should end risky speculation and return to their more traditional role as ‘stewards’ of people’s money. Retail sales figures on Friday boosted the Pound as they rose by 0.7% for the month of January taking annual sales up by 3.6%. However this comes at a time when retail analyst Experian predicted 10% of high-street stores will be empty by the end of February and more solid trends may be visible in quarterly statistics. Nationwide housing prices are released in the UK today with new mortgage approvals out tomorrow.

US Dollar - US Markets

The Dollar has weakened for the third consecutive day on speculation that the US government may bail out major banks even further. The Dollar is down 0.74% on the Canadian Dollar and has also declined the Pound, Euro and other major currency partners.

Dollar weakness comes after Christopher Dodd, Chairman of the Senate Banking Committee announced that nationalisation of some banks may be necessary. Wall Street and equity markets fell to multi-year lows and the Dollar declined against the Euro and Yen. The Philadelphia Fed survey on Friday showed manufacturing has slumped to a 19 year low and a survey of business economists has shown the US recession is the worst in three decades. Consumer spending accounts for 70% of the US economy and this is expected to decline by 2.3% this year. There is no data out in the US today.

Euro – European Markets

The Euro has also rallied against the US Dollar, currently sitting at 1.28 after attempting to break 1.30 overnight. The Euro has also gained on the Yen and is currently trading at 0.88 against the Pound.

Leaders of Britain, France, Germany and Italy met over the weekend to formulate a position ahead of the G20 meeting to take place in London in April. Tighter market regulation and an end to risky speculative investments are expected to top the agenda. European leaders also agreed the IMF’s emergency fund for debt stricken countries should be increased to more than $500 billion. ECB President Trichet is to give a speech today.

Other Currencies - Highlights

The Australian and New Zealand Dollars have appreciated for the fourth consecutive day against the Dollar on speculation that the US Government is to increase its stake in the major US Banks. The Yen also declined amid speculation over the deteriorating Japanese economy expectations that export demand will continue to slump. This weakness could eventually undermine the safe haven status of the Yen. Minutes from the Bank of Japan’s February meeting are released today. The Canadian Dollar has gained against the US following weaker American equities and reports that Canadian core inflation fell by 0.4% in January. Canadian retail sales figures are due today.

New statistics were published today by the Council of Mortgage Lenders on mortgage arrears and possessions. Unsurprisingly, full year figures for 2008 show a sharp rise on 2007, but many steps are being taken to help borrowers facing difficulty. Interestingly, there were 5,000 fewer repossessions than expected and were forecast in the previous year, with the measures that were introduced towards the end of year seemingly having some kind of effect.

A few stats and figures released by the CML today:

* 5,000 fewer repossessions than forecast in 2008
* 40,000 repossessions in the year - 1 in 290 mortgages
* 10,400 repossessions in the fourth quarter - 1 in 1,100 mortgages
* 1 in 64 mortgages in arrears of 2.5% or more
* 1 in 53 mortgages in arrears of three months or more (inflated by lower interest rates)
* 75,000 repossessions forecast for 2009 remains unchanged.

Around 10,400 properties were taken into possession by first charge mortgage lenders in the fourth quarter of 2008, down from 11,100 in the previous quarter but up from 6,900 in the fourth quarter of 2007, according to the Council of Mortgage Lenders. The total number of first-charge repossessions in the year was an estimated 40,000. This was 5,000 lower than the CML’s original forecast for the year.

The fact that there were 11% fewer repossessions than expected, despite a worsening economy and rising unemployment, demonstrates that mortgage lenders are making strenuous efforts to ensure that repossession really is a last resort. It is important to recognise that repossessions include a proportion of abandoned properties and property fraud. They also include buy-to-let repossessions, as well as home-owner repossessions. In the vast majority of cases where home-owners are committed to working with their lender to keep their home, this outcome is successfully achieved.

At the end of 2008, around 182,600 mortgages - or 1.57% of the total - had accumulated arrears equivalent to 2.5% or more of the outstanding balance  - for example, £2,500 or more on a £100,000 balance (a £97,500 mortgage plus £2,500 arrears). This compares with 1.29% at the end of the third quarter of 2008, and 1.08% at the end of 2007.

On a “number of months” basis, 219,100 mortgages were in arrears of more than three months at the end of 2008, up from 166,600 at the end of the third quarter of the year, and up from 127,500 at the end of 2007. However, the big reduction in mortgage rates experienced in 2008 was a significant influence on the rise in the number of arrears cases measured on a “number of months” basis - as the same given sum of arrears represents a higher number of months payments as interest rates fall.

The vast majority of people who face temporary difficulties successfully work with their lender to stay in their homes, and get their mortgage back on track over time. Where borrowers contact their lender early, maintain good communication and are committed to paying what they can and resolving their arrears, lenders work hard to help wherever the household’s future prospects look feasible.

Source – CML Press Releases

I was hoping to get a blog done yesterday to discuss the ongoing crisis but didnt…with the news that the FSA chief has resigned due to the whistleblower comments of yesterday, I have more discuss!

In fact, rather than prattle on like so many currently do as to the why’s and wherefores, I’d like to offer another solution. Split the retail and investment banks completely…. Of course, it is likely that the investment bank is funded from the retail banking part of each Group, so whether this ever happened is open for debate. However, with banks running to the taxpayer tail between their legs, it’s about time the taxpayer demanded and got what they were after.

What is it the taxpayer wants you may ask? A secure and well run bank for starters. A return to the days when you could call in at your local branch and talk to someone who could make a decision. I recently walked into my local branch to get some old bank statements and was told I had to write off and I would be charged £30 for the pleasure! The fact that a printer was right next to my personal banker did not seem to help…

Bank customers also want a return to customer service as at least an equal to a bank’s other primary objective of making money (it is not keeping your money safe!). If a bank wishes to gamble with funds through its investment division it is quite entitled to, but not at the loss of security for its customer’s deposits. The only alternative can be that the two divisions are split, with tax payer money funding the retail bank only (and therefore its improved service) whilst the investment bank fights on it own to get itself out of the trouble it got itself into…..In this instance retail banking would not suffer.

Unfortunately this is not the case, and as a result retail banking will continue to suffer whilst the cash machine known as taxpayer funds are diverted into the investment division to prop it up (or retain the usual profit margins, commonly known as “re-capitalising”).

Businesses that are failing are left to die, as we all saw with Woolworths. Why shouldn’t that be the same for investment groups? Split the banks, nationalise the retail side until it improves, and let the investment division fight like we all have to…saying sorry to government this week is not, and should not, be enough!

As we like to do at Discover and Invest, let’s look for the solutions to our needs…

It appears that the first chunk of money RBS received wasn’t quite enough. As predicted by many, another bailout has been announced, and it is also being predicted that it will not be the last.

We surely have to start questioning the government’s role in this episode. Having part-nationalised the bank, the government have representatives at board level, in theory to steer the bank to safety and to get it lending again. So far it appears neither has happened.

What also seems to be the case is the lack of transparency where the level of debt is concerned. Do we really not know the total level of debt that RBS owes? Why is that? Gordon Brown today has said he is “angry” with RBS for the debt but how is it he did not find out about this at the last bailout?

Whilst this chaos continues apace, the taxpayer is continuing to foot the bill. Some say this is essential to the economy as we cannot have the banks failing, which we can’t. However, it does have the taxpayer over a barrel. The biggest problem is the huge sums involved. What does billions of Pounds mean in reality for the taxpayer? We aren’t going to know for a year or two that’s for sure. The effect on the economy then , in terms of inflation and increased public debt, could be worse than the problems we face today.

It is difficult to know where this will all end. With light regulation, private sector firms deemed too big to go out of business are safe in the knowledge that the taxpayer pot is available to save them. The biggest case to answer is the lack of transparency however, not just here but also in the US. Our elected representatives are taking measures on our behalf that is not only costing an astronomical and unprecedented amount of money, but that also concerns our savings. In light of the seriousness of this episode, we as citizens have a right to know how the funds are being spent and what the true state of the balance sheets of these companies really are.

It has been extremely concerning to see that short-selling has made a return.  Although the ban was temporary to begin with, it seemed to be a measure that stabilised the markets when it was introduced.

Short-selling as defined by Wikipedia, “is the practice of selling a financial instrument that the seller does not own at the time of the sale. Short selling is done with intent of later purchasing the financial instrument at a lower price. Short-sellers attempt to profit from an expected decline in the price of a financial instrument.”  The controversy comes into play when it is suspected that parties with large sums of capital manipulate the markets to send a stock downwards in order to profit.  The larger the fall, the larger the profit.

So  back to short-selling’s return.  Low and behold, Barclays’ share price drops 25% in a day amid calls for a new financial bailout (and further panic).  A statement read that  “The board of Barclays knows no justification for the fall in the share price”; in other words, short-sellers are considered likely to be responsible.

Humans are creatures of comfort and therefore we like stability.  As a result of stability gained, we begin to feel confident and look to improve on whatever situation we find ourselves in.  Confidence breeds success and therefore stability is a vital ingredient for a positive economy.

As a result, nothing can be worse than market volatility.  As famous investors have noted in the past, markets are generally run by human emtions.  If we are confident, the markets rise.  If we are uncertain and feeling in a panic, the markets and the economy are bound to suffer.  Stability leads to confidence, volatility leads to panic.

So if we genuinely want to solve our dilemas sooner rather than later, stability should be sought.  All agree that the lack of regulation in financial markets has caused this disaster, but we then go and shoot ourselves in the foot by allowing short-selling to return.  A ban on short-selling should be permanent, if only for a return to a stable economy.

We are all in trouble this year. The property market has crashed, unemployment could reach record levels’, spending has decreased and we are all basically going to have one of the most miserable years since the last doom and gloom crisis to sweep the country. Add to this the high street is crashing and industries are dying and we really don’t sound in that greater shape, do we?

I am sure that whilst a small percentage of the populate are experiencing some of, if not all of the above, for the rest it is pretty much the same as normal, albeit with a heightened sense of needing to save a little bit more money, just in case.

From a personal point of view, I can afford my mortgage repayments, I have a manageable level of debt and the bills, although rising for some areas, are still under control. I believe this is the case for the majority of the country, but this is not what we are lead to believe, on an almost daily, if not hourly basis.

My routine always involves a quick check of the BBC news website as soon as I enter the office in the morning. For the past 4 months, I could always guarantee there would be a story about the recession or something connected to it. When I reached my Englishman’s castle, I turned on the news, again, the guarantee of more doom and gloom about the economy was featured, if not the headline for that day.

At some point in every year since time began, a small percentage of every community, town, village, city and country would be experiencing money issues. There would always be a percentage of people unemployed and since mortgages began, so did repossessions. But this year, it all seems a little more serious, which we learn from the news. Yes, we are in a recession, yes the property market is crashing and yes, the next year does not seem a lot of fun, but would we all feel as bad, if it was not for the media that tells us this all of the time?

The media influences how we should feel and think about every topic or matter known to man. Stories can be displayed to make us feel how the media would like to think we should feel. We are made to hate certain people, dislike certain celebrities and now, we are almost being made to feel scared, worried and as pessimistic as we have ever felt before.

With the rise of 24 hour news, websites updated every second of every day and the emergence of topical newsletters and blogs (of which this is one admittedly), we just can not escape this current epic voyage of disaster. Even shopping in my local supermarket, whilst queuing at the never end queue for the checkout, the 4 plasma screens were a mixture of the latest BOGOF’s, discounts on Penguin bars and updates from BBC news about the latest interest rate cut! Overkill? I think so.

My point is quite simple. If it wasn’t being covered quite as much, would the country feel better? For the vast majority of us, we are still in work, paying our bills and living like we are used to, just with a little more thought for what might be and an increased sense of needing to save the pennies we can. On one hand I love this constant supply of information, in fact I would miss it should it not be available, but on the other, I just cant help but feel we might be feeling slightly better, without it.

So another rate cut by the Bank of England to the lowest ever in its 315 year history; quite something!

The next couple of years will tell us whether these cuts will work or not, but it does seem in the short-term to be counter productive.  Retail banks are not lowering their mortgage rates because the LIBOR rate is too high, and the lowering of interest rates greatly affects savers at the very time when the government is asking us to save more!  Therefore it is questionable as to who it helps in the short term.  VAT has been reduced, but on the typical item of clothing, say at £30, this is hardly putting money back in people’s pockets.

There are even suggestions that the government will have to “expand the money supply”, which to you and me is printing more money and potential inflation.  If this happens, the question that follows is who gets this new printed money?  It’s our old friends the banks of course.  The government will buy assets in the banks in exchange for newly printed money.  However, I am pretty sure that was what happened in the recent bank bailout, no?

Ultimately, there may well be a shift in consciousness here.  We have been living in a false economy for some time built on credit that doesn’t seem to exist.  “Where has all the money gone” seems an apt question right now.  With debt levels so high, the money supply may have naturally contracted with the increasing payments people need to make.  The only action that may be logically left for the government is to increase the money supply to make up for the shortfall.  However, we are walking into an inflation minefield, the one the current Prime Minster said would never happen again.

I believe we need a mentality shift away from credit, and until drastic action is taken, such as cancelling large percentages of debt, the current problems may well persist.

The question everyone seems to be asking at the moment is what will happen during this recession? Although many things will tend to be changing, there are certain key things that usually happens during a recession and these are listed below –

• Houses Prices Fall – One of the most noticeable effects of a recession is that house prices begin to fall. This is mainly because people are not buying or selling, which forces the prices down. Some sources indicate that house prices have fallen by about 20% during this current recession, with many fearing a larger drop before we get out of it. But, one thing to remember is over the history of time, house prices have continually risen, so this is just a blip in the long term graph of house prices.

• Job Losses – Another key effect of a recession is that unemployment will rise. Due to poor sales, reduced production and short term forecast negativity, employers will seek to cut costs by reducing their workforce.

• Reduced Lending – During stable and profitable times, lending is high, especially mortgage lending. During a recession lending noticeably decreases, with many struggling to obtain loans, credit cards and mortgage lending.

• Reduced Spending – People tend to save more money during a recession, thus decreasing the spending on material possessions and also the necessities in life. Consumers will tend to look for lower prices on everyday products, and put off purchasing anything that is not vital.

• Interest Rates Fall – Generally, during a recession the interests rates will fall and be lowered by the Bank Of England. This is mainly to encourage spending and to try to stimulate the economy to reveres or reduce the effects of the recession on the country. Some predict we may see interest rates drop to their lowest rate in 200 or so years, an amazing 1%.

• Businesses Close – If people are not buying and the employer has done everything they can to continue but without success, they will enter administration with the usual effect being to close down. This of course leads to fewer jobs, higher unemployment and decreased spending, a somewhat vicious circle.

• Lower Prices – Shops and manufacturers will tend to drop the prices of their products to increase the spending and therefore increasing their sales. Generally, most things will become cheaper, although electricity and gas prices do not seem to follow this trend.

There are of course other things that could happen during a recession. Some people will say that crime will rise, due to the negativity sweeping the country and the hard times many people will face. Although this is not statistically proven, it is a logical effect of a continuing credit crunch as people struggle to make day to day living affordable.

Sterling continued its decline against the Euro yesterday after the MPC minutes revealed a 9-0 vote in favour of a 1% base rate reduction. Labour market data in the UK revealed a 0.2% rise in the official unemployment rate, taking it to 6% for October and the Pound continued to plunge towards parity with the Euro.

Pound Sterling - UK Markets

Yesterday was another black day for the Pound as labour market data and the release of the MPC minutes sent Sterling plunging towards parity with the Euro. This morning Sterling has reached another record low against the single currency of 1.06. The Pound also depreciated against the US Dollar, falling away to 1.53 and lost ground against its other international currency partners overnight.

The MPC minutes showing a unanimous vote for a 1% reduction was interpreted by markets as an indication of further rate cuts to come and this sent Sterling into a freefall. The Pound is yet to find a bottom against the Euro and is rapidly approaching parity. Weak labour market data also showed the official unemployment rate rose to 6% in October and this is expected to continue to rise as more companies are forced into redundancies by the credit crunch. Yesterday David Blanchflower predicted unemployment could top 3 million. This morning retail sales figures showed an unexpected rise in November taking year on year growth to 1.5%. On the positive side, there is the view that the very weak Pound is preventing the manufacturing and export sectors of the British economy from further downturn. With no further data in the UK today Sterling is expected to remain under pressure.

US Dollar - US Markets

There have been mixed results for the US Dollar overnight. Gaining nearly 1% against the battered Pound, the Dollar has lost ground against its other major partners as 0.25% interest rates in the US have boosted investment in the higher yielding currencies.

The price of crude declined yesterday following the OPEC announcement to cut production by 2.2 million barrels a day. This morning oil is trading back at the $45 level, as threats to supply were mitigated by IMF statistics which revised global growth predictions downwards. The Philadelphia Fed Manufacturing Survey, regarded as a reliable snapshot of the manufacturing industry, is out today.

Euro - European Markets

The Euro continues its bullish run on the Dollar and Pound, gaining nearly half a percentage point this morning on the Dollar and 1.3% on the Pound to trade at a new record high of 0.94.

Yesterday’s figures showed German business confidence fell to its lowest level since 1982 as recession takes its toll on the Eurozone’s largest economy. German manufacturing figures have been in decline for five consecutive months and exports have contracted by 0.5% as global demand grinds to a halt. The ECB meets today and may announce measures to facilitate greater interbank lending which is still regarded as one of the greatest barriers to economic recovery. The EMU trade balance is also out today.

Other Currencies

The Australian and New Zealand Dollar have gained for the fourth consecutive day against the US Dollar as widening interest rate discrepancies lead investors to favour the higher yielding currencies.

Benchmark interest rates are 4.25% in Australia and 5% in New Zealand compared with 0.3% in Japan and 0.25% in the US and this large discrepancy has supported the Aussie and Kiwi Dollars recently. The Japanese Central Bank meets today amid pressure to lower the value of the Yen which reached a 13 year high against the US Dollar this week. The Bank of Japan’s interest rate decision is due tomorrow.