The end of the prologue

The report in today’s ‘Financial Times’ that Barclays Bank has lost ‘several hundred million dollars’, means that the UK has now joined every other global financial centre in suffering from the US subprime mortgage crisis. The news followed Friday’s 5% drop in the value of Bank of China’s shares, after it revealed it held $9.7bn of securities backed by sub-prime loans.
The question now is whether this purely financial crisis will roll over into the real economy? So far, the signs are hopeful that it won’t. The latest weekly Economic Report from Kevin Swift at the American Chemistry Council actually shows a slight improvement in its running tab of positive indicators to 16 out of 20.
And outside the USA, the ACC report shows that ‘global chemical industry production expanded in July’, offsetting a revised decline during June. It says that the ‘improvement was broad-based and was strongest in Africa and the Middle East and in Central and Eastern Europe.’
However, Kevin does caution that key US indicators such as durable goods orders and leading economic indicators may not yet be fully reflecting recent financial turmoil. Whilst the US National Association of Realtors reported yesterday that the median US house price fell in July for a record twelfth consecutive month, and is now 0.6% lower than a year ago.
At the moment, liquidity seems to be improving again in financial markets, and some confidence has returned. But as I noted on 10 August, US house prices haven’t declined nationally since the Great Depression. With median wages static, and falling house prices, will US consumers decide to cut back their spending? And will lenders be happy to continue lending to them, if they need to borrow more to maintain their spending?
The subprime crisis is too recent for anyone to know the answers to these questions. But people are already beginning to return from the beach, as the summer holiday season comes to an end in the northern hemisphere. As we move into September, we may therefore begin to discover whether the Barclays news marks the end of the current financial crisis, or is a prologue to its extension into the real economy.

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