So now we have it from the horse’s mouth. Bank of England governor Mervyn King says we are living through the worst financial crisis in history. You would expect him to know, since he sees figures we do not.
People won’t like it – why should we? But here are two facts: the recession was deeper than previously reported, output dropping not far off the fall in the 1930s. The ‘recovery’ since has seen UK household consumption contract by 1.8% in the past year. That would inevitably make selling holidays tricky, at least to those suffering the contraction (not everybody suffers equally and some had more to start with).
What impact might the second round of quantitative easing (QE2) have on travel? In theory, the Bank of England has put an additional £75 billion into circulation. In practice, you and I may see none of it. Last time the bank did this, to the tune of £200 billion in spring 2009, share prices rose, commodity prices rose, sterling fell and inflation rose.
The economy did subsequently recover from recession – perhaps helped by QE, but more likely due to the global economic recovery which had nothing to do with the Bank of England.
Sterling fell on Friday and the Bank forecast the latest bout of QE will add 0.3% to 0.6% to the inflation rate. That in turn will hit household spending. None of this is good news for travel.
It is suggested QE2 will boost confidence. This is debatable. The City certainly wanted it, but appears cynical about the impact although share prices did rise following the announcement.
The travel industry runs on confidence, of course. Companies whose figures don’t match their confidence would be better off not being listed on the London Stock Exchange at present. Thomas Cook we know about – although let’s note the company’s share price convalesced a little last week, rising from Wednesday to Friday and recovering 8p or more than 20% in value. (The group’s market cap remains 76% down on a year ago.)
Now Cook has a competitor as the sector’s worst-performing listed company – Flybe. The regional carrier has had a stinker since joining the FTSE last December. Last week it issued its second profit warning this year (something Thomas Cook has not done: it has issued one warning this year and two last.)
Flybe has lost 78% of its value since flotation. Economic reality has not matched the carrier’s expectations or earnings forecasts. In practice, Flybe still expects to make a profit this year – perhaps one third of the £36 million it originally forecast. In the circumstances, that may not be at all bad.
None of this is an expression of pessimism. On the contrary, recognising the extent of the difficulties should lead to the conclusion that the industry is doing remarkably well under the circumstances. The trade is not down by anything like as much as the outbound market, and the market remains huge – 36 million people will have taken overseas holidays from the UK this year, more than in any year up to 2000.
We probably are in the worst-ever financial crisis, by the way, but not the worst economic crisis – not yet. Following the crash of 1929 and governments’ reaction to it – the US allowed 1,600 banks to fold – unemployment hit 25% in the US and 50% in Germany, paving the way for Hitler. (The impact on the UK was softened by the markets of its empire. Unemployment in the US today is 9.1% – the highest since the 1930s – 6.1% in Germany and 9.5% across the EU).
We are not at the end of the crisis, however, but in the midst of it. There seems to be a belief, maybe a hope, that the bank bail-out fund being forged in Europe may stabilise the financial system and prevent a meltdown. This may be so. However, the rescue scheme is an incendiary device, as Wolfgang Munchau of the Financial Timeshas pointed out (£).
In broad strokes: the crisis of 2008 stemmed in no small part from the systemic use of financial devices such as collateralised debt obligations (CDOs) which spread lousy ‘subprime’ investment ‘risk’ so wide as to bring down almost anyone when the house of cards collapsed. So how do you suppose EU leaders propose to structure the €250 billion fund they are assembling? Why, as a CDO. “This is the equivalent,” says Munchau, “of putting explosives into a can before kicking it down the road.”
Europe’s governments want to increase the bail-out funds available without ramping up their individual budget deficits. They don’t want the liability on government books – any more than the UK government wants the Air Travel Trust fund deficit on its books – even though, as always, taxpayers will be the underwriters of last resort.
At one level it is a clever solution to a tricky problem. EU governments – particularly Germany, which holds the biggest purse – dare not run the political risk of making the colossal pay outs that are required. Just as CDOs allow banks to lend more money than they hold, they allow governments to do the same – in the knowledge that a government can always raise taxes and squeeze the money out of its citizens.
What does it mean? That a successful outcome to the current crisis will at best postpone a reckoning that risks developing into an even bigger blow-out. “It is the last confidence trick in the toolbox of the truly desperate,” says Munchau. “The euro zone is about to kick the can…”