Brian Murphy Blog

Friday 7th October 2011

The latest revised economic growth figures paint a continuing picture of an economy struggling to move forward. Growth of a mere 0.1%, down from what was already seen as a lacklustre estimated 0.2% for the second quarter, demonstrates that both business and consumer confidence remains weak. 

We are always looking for positives and there was some good news in the last few days with reports showing that the manufacturing sector had expanded, in contrast to expectations that it would have flat-lined or contracted further. 

The Eurozone crisis appears to be going from bad to worse following reports that Dexia, the jointly owned French/Belgian banking group, may require State intervention to support it due to its exposure to Greek debt and their increasingly likely default.  

The financial markets have been spooked due to the time it is taking the politicians to agree a strategy to deal with the sovereign debt crisis.

Perhaps more concerning is that as recently as July the top 90 or so European banks were largely given a clean bill of health having been subjected to a series of supposed “stress tests” to determine their ability to withstand additional financial pressures, the likes of which they are currently being exposed to.

If Dexia was at that time deemed financially able to withstand the sort of pressures it is now experiencing, it begs the question that the tests were not sufficiently challenging or that they were testing for the wrong stress points.  

Either way, concern must now be raised as to the financial strength of a whole host of other European banks, and if they too are found to be less robust than was thought, inter-bank lending could very quickly seize up as it did in 2008/09 starving businesses and consumers of capital and loans and likely pushing up the cost of that borrowing.

Currently, we are not seeing any adverse effect on the UK mortgage market, with broadly the same range and number of products as last month, and pricing on average five-year fixed rates has once again fallen further in October from September. The average cost of two-year fixed rate deals has edged up on last month but is still below where they were in August. 

Brian Murphy is Head of Lending at Mortgage Advice Bureau