2008 And All That

As another year draws to a close, we look back at the financial trends and milestones of 2008. It's been an `interesting' year!

2008 was the year when financial news hit the headlines in January and stayed there. It began with a French `rogue trader' causing a mini market crash and ended with what could be the biggest financial fraud ever. Here are a few of the highs and lows of the past twelve months from a personal-finance perspective:

Bank of England base rate

As the UK economy took a turn for the worse in the summer, the Bank of England responded by reducing its base rate three times in three meetings:

The base rate is now at an historic low, matching the 2% a year last seen in 1951. While this is good news for those with variable-rate mortgages, it's no help to those with fixed-rate home loans. Also, it is a blow for savers, whose income from deposits has been almost halved, which is bad news for pensioners.

House prices

It was a horrible year for homeowners, thanks to the painful lesson that house prices cannot forever exceed wage rises and economic growth. In the US, the S&P Case-Schiller index reported falls approaching 30% in some cities. This led to gargantuan losses by American banks as borrowers defaulted and walked away (scot-free, in many states!).

In the UK, all the house-price indices turned negative as the extent of the 1995-2007 housing bubble became apparent. The Halifax House Price Index will end 2008 down more than a seventh (15%), with Nationwide BS reporting similarly steep falls. The myth of `Fortress London' failed to live up to its hype, as London and the South East suffered steep falls, both in absolute and percentage terms.

Indeed, property firms are petrified at the thought of talking down the market even further. Thus, the Halifax and Nationwide BS refuse to make property-price predictions for 2009, as has trade body the Council of Mortgage Lenders.

Mortgage lending

As the housing crash and banking blow-ups gathered pace, mortgage lenders became increasingly reluctant to lend to all but the very best applicants. Hence, net mortgage lending (new lending minus repayments) collapsed in 2008. Having reached an all-time peak of £117 billion in September 2007, it slumped to a seven-year low of £49 billion in October 2008.

What's more, some pundits predict that net mortgage lending will turn negative next year. In other words, as a group, homeowners will repay more than they borrow, which will be a heavy blow for an already weakened housing market.

Pensions

Thanks to plunging stock markets and annuity rates (pension incomes), pensions remain firmly out of favour. Indeed, Halifax reckons that over half of UK workers (52%) don't pay into a pension. The trend for companies to close generous final-salary schemes continues, with many more workers transferred into riskier, less attractive money-purchase plans. Throw in the unfunded cost of public-sector pensions and the £4,700-a-year state pension, and our retirement time-bomb ticks ever louder...

Savings

As house prices boomed, we Brits lost the precious savings habit. Indeed, the savings ratio -- which measures the proportion of our take-home pay that we save -- collapsed to its lowest level since 1959. Back in the first quarter of 1992, the savings ratio hit 12.2%, so we were saving almost an eighth of our earnings. Here's how saving shaped up in 2008:

As you can see, the savings ratio was negative in the first quarter, which means that we dipped into our deposits, rather than adding to them. However, it has started to improve, with building societies recording record inflows of cash during 2008.

Then again, saving became much less safe in 2008, with several major banks gratefully grabbing government bailouts. These included Northern Rock (nationalised in February), Bradford & Bingley (nationalised and partly sold off in September), Lloyds TSB and HBOS (forced into a takeover) and Royal Bank of Scotland.

In addition, the collapse of Icelandic bank Icesave tied up billions of pounds of savers' money until the bailout by the Financial Services Compensation Scheme. Sadly, the government has yet to rescue savers who lost out when offshore subsidiaries of UK-registered banks went bust, leaving thousands of Brits nursing an £860 million loss. What a shameful disgrace!

Stock market

2008 will go down as the year when even the most experienced investors took a beating. The UK stock market is down a third (33%) on its starting level for 2008 -- its biggest fall in 35 years. Even billionaires have been humbled, as the banking collapse, plus plunging oil and commodity prices, left asset prices in the doldrums.

The bad news started in the fourth week of January when French banking giant Société Générale took a _4.9 billion bath, thanks to the antics of rogue trader Jérome Kerviel. I don't have space to run through all the bank collapses and bail-outs that followed. 

The year ended with news that Wall Street veteran Bernard Madoff's `hedge fund' was an old-fashioned Ponzi scheme. In other words, new investors' contributions provided bogus returns to existing investors. $50 billion is thought to be at stake. Throughout 2008, hundreds of other hedge funds blew up or were forced to close as banks withdrew lines of credit.

2009 will be even worse...

Lastly, after sixteen years of growth, the ever-expanding UK economy went into reverse this year. Even worse, some commentators are predicting that our gross domestic product (a measure of our national output) could fall by up to 3% in 2009.

This could prove to be the sharpest downturn of the post-war era, and will inevitably lead to higher unemployment. Indeed, forecasts for job losses next year range from 600,000 to 1.1 million. However, don't believe the doomsters who predict the end of consumer capitalism. History shows that, even after severe downturns and global conflicts, free enterprise finds a way to bounce back.

Here's wishing you a safe and secure 2009!

More: Start building a savings safety-net today | Hopes For 2009 | Winners From The Credit Crunch