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Wednesday, 29 August 2007

Sub-prime woes to hurt more than just the City Boys

To those who haven’t been around for the past couple of weeks the stock markets have been going through absolute turmoil. The fall out from the sub-prime lending market in the United States has had ramifications not only in the United States but across the global financial system. How long this crisis will last is yet to be seen and the wider outcome is yet to be known. However don’t be fooled into thinking this is not going to have an impact upon those outside the financial markets, it will.

To those who don’t know the current market turmoil has been created by a problem in the United States sub-prime mortgage market. The sub-prime mortgage market is where banks lend to people with a poor credit rating at a higher interest rate – in the hope of higher returns. However, the market became too loose and too overstretched. As base interest rates rose in the United States and the economy slowed, borrowers saw mortgage payments rise at a point when jobs were being cut and wage growth slowing. As a result defaults on mortgages increased rapidly.

So why didn’t the problem stop with the mortgage lenders? The problem has had wider consequences because those banks that lent in the sub-prime market packaged up some of this debt as a financial product and sold it to willing buyers in the international financial market. This was done as an insurance measure against widespread defaults. However, the selling of sub-prime mortgages went too far and rather than acting as an insurance against the risk, international financial markets have been pulled into the crisis.

The result is that financial markets have seen billions of dollars wiped off them in August. Several hedge funds have been closed and many of the major banks have suffered huge losses. This crisis has also led to a steep drop in confidence. Banks are no-longer willing to take the risk and lend to one another. As a result this has created a credit crunch where investors have not been able to borrow credit and as a result of a falling credit supply the cost of borrowing has risen rapidly. The Fed, the European Central Bank and other major banks have reacted strongly by cutting interest rates and by pumping credit into the markets. This has helped to temporarily stabilise markets but volatility remains high and no-one is yet saying things are in the clear.

Looking forward to the rest of the year and into 2008 it seems likely that the impact of the sub-prime market will run on and on in a number of different forms. Businesses are likely to find it increasingly difficult to find credit, especially the cheap credit they’ve been used to in recent years. This will reduce the ability of businesses to expand and capitalise on opportunities as and when they arise. Consequently business activity will be reduced, which will hit GDP growth.

The reduction in business activity will also hit employees. The first people hit are likely to be the City Boys who are not going to see the same bonus payments they have become used to. It has already been estimated that city bonuses may be reduced by up to 20 per cent in 2007. Jobs in financial services are also likely to suffer, with slowing headcount additions and even with a net loss of jobs.

However, with slowing business activity and reduced consumer demand from those working in financial services, the impact will be felt by every sector of the economy. There are few that will not be affected by the current financial crisis; jobs will be lost in all sectors. Those businesses which are not able to grow will not be able to increase the amount they spend on suppliers.

Those thinking that the sub-prime mortgage crisis is something that only those working in finance need worry about should think twice. Get ready for higher unemployment, slower wage growth and ultimately a difficult couple of years.

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What will they ask - Myspace

I've started a What will they ask? page on MySpace to try and encourage more people to visit the site and share their experiences. This can be found at www.myspace.com/whatwilltheyask

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Saturday, 25 August 2007

Here comes the sun

Just a quick note to anyone who is thinking applying for a job this weekend - don't! We've had a crap summer and we all need to appreciate this excellent sun that has final decided to show its face. So go sit in the sun, have some drinks and then enjoy, it's unlikely to last.

You never know, life might not seem so bad when you get back to work on Tuesday and you might just decide to stay!

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Thursday, 23 August 2007

Gross Value Added - pub speak for geeks

I was in the pub last night and was talking to two guys who studied masters economics with me at university and was amazed to find out that none of them knew what GVA was.

To the majority that won't know (which is fair enough) GVA stands for gross value added and is a measurement of economic output. Essentially it is very similar to GDP (if your interested GVA = GDP - taxes on production + subsidies on production) and is calculated by summing the value added in each stage of production minus the cost of intermediate goods in the production stage.

E.g. I buy some paint and paper for £10 and paint a picture for which sells for £20 then the GVA is £10.

Anyway moving on from the GVA thing, this discussion got me thinking about education and careers. When it comes down to it these guys (and so have I) forgotten a lot of what we were taught at university. Nevertheless we all remain employed in pretty good jobs.

It really shows in many ways that us economists are right about eduction - it is more useful as a signal to employers than it is in increasing production. Unless - like myself - you are working in the same field that you studies, most of what you learnt will go to waste. However, by the very fact that you passed your degree shows you have the ability to think at a higher level and have proof that you can achieve. The person with no degree might be better than you but without the university certificate then the employer has no proof, making the risk of employing them that much greater.

This seems like a very good argument for a) going to university / working hard at school and for b) making exam grades more widely distributed (not a fifth A* and A like GCSEs) so that employers can take full advantage of what a lot of education is about - showing them that you're better than the next guy.

Oh and yes I have shown my true geekiness by admitting to talking economics in the pub when the England Germany match is going on behind me!

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Tuesday, 21 August 2007

CV on one page

It seems that there is a trend to get CVs down to one page.

I really want to know who are the people that decide that they wouldn't read a well set out, clear CV that is written on two pages.

I personally prefer two pages. The CVs that I have seen on one page are either lacking in detail or are jam-packed onto one page, making the CV very difficult to read.

Perhaps there is a case for a one page CV for your first job as some employers don't really care about what you've done outside of school or university. Then again many do and I don't think its worth the risk leaving that stuff out!

If you're an employer who'd reject someone with a two page CV then you probably should look twice at your recruitment policy.

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Monday, 20 August 2007

Equity markets up for now

So it looks like the markets have steadied a little today following the decision by the Fed to lower the interest rate at which they lend to banks. However, given the limited improvements in equity markets today it is unlikely that the storm is over.

Expect more problems this week as more companies are forced to reveal the extent to which the subprime mortgage market and the subsequent market turmoil has hit various businesses.

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Sunday, 19 August 2007

Article 1 - Tough times 2008

On the surface all is looking very rosy for the UK labour market if you’re looking for a job. Despite a huge inflow of migrant workers since the enlargement of the European Union the number of people claiming unemployment benefit has consistently remained below the one million mark in the last two years and has fallen by over 100,000 in 2007.

Nevertheless cracks are starting to show in the economy. Interest rates have risen five times since July 2006 and are likely to rise one more time by the end of the year. Higher interest rates are likely to hit both consumers and businesses alike as debt repayments become even more of a stretch. It should be noted that increases in interest rates take about a year to feed through to the economy so get ready for last years rate rises to start to hit!

Other weaknesses are showing. The slowdown in the US economy has been going on for most of the year without major consequences for the UK. The recovery in the major EU countries has helped to buffer the reduction in US demand for UK exports. However, the EU recovery is starting to look short-lived. The Italian economy posted very weak growth figures in the second quarter of year, whilst higher European Central Bank (ECB) interest rates are starting to hinder Germany and France.

Nevertheless on the surface it would seem that the slowdown is not having much of an impact on people’s day-to-day lives. Last week’s financial market chaos would have been a big headache for those working in the City of London or those with large share portfolios, but that’s a minority of the country.

The financial chaos should however start alarm bells ringing. It is not yet clear how the current mess in the international financial markets will play out, but if this turmoil continues then the cracks in the economy could well become holes for jobs to fall through. The financial crisis has exacerbated problem – few had been predicted that the United States could potentially move into recession until the events of last week.

It seems unlikely that the UK will suffer as much as the US. There are no credible analyst suggesting that the UK will enter a period of recession, but as the economy is squeezed by higher interest rates and as chaotic financial markets hit business confidence there will be those that will lose their jobs.

The first possible group to see job losses will be those working in the financial and business services sector in the City of London. Initial estimates had suggested that job losses in the City are likely to number a few thousand, but this number is likely to be revised upwards. The impact of this will be relatively limited to the London area.

The next sign to watch out for is a slowdown in consumer and business spending. With the financial markets looking wobbly and with higher debt repayments businesses will reduce their spending on goods and services, and also on headcounts.

Uncertainty in the financial markets leads to uncertainty in the business environment. Plans to invest will be hit as uncertainty increases the risk that they may not be able to afford the repayments in the future.

A slowdown in consumer spending is likely to follow. Higher interest rates will increase the cost of consumer debt repayments, primarily mortgages. However, this is likely to have a limited impact according to the Bank of England.

Consumer spending will also be constrained by the reduction in business spending. As businesses reduce spending employment growth will slow as will wage growth. With less money in their pockets the consumer will stay at home, rather than spending on the high street.

With business spending less on goods and services, those that supply those goods and services will have a reduction in turnover. With consumers spending less on goods and services these suppliers will also see reduced turnover. Lower turnover cause firms to fold or reduce costs; inevitably job cuts will be part of this process.

So when will this all come to a head? Most analysts suggest that 2008 will be the crunch point when the various factors come together to produce an economic slowdown. Expect to feel the pinch wherever you work, there are unlikely to be many sectors that don’t see an impact.

With this warning in hand I would suggest knuckling down and making sure your boss realises that you’re indispensable, even when business is bad! 2008 is going to be a tough year try to limit the suffering.

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First post

Hi everybody

We've set this blog up to keep you up to date with all the developments at What will they ask.

We'll be posting all the latest news and views as well as the new series of article that we are currently producing. I hope you enjoy these, and look forward to hearing what you think.

Thanks for visiting

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