THE ECONOMY: HOW BAD WILL IT GET A SPECIAL REPORT BY WESTMINSTER

0 Comments | Sunday Herald, The, Jun 8, 2008 | by JAMES CUSICK

Wealthy hedge funds are circling like vultures taking bets on other emerging victims.

Lloyds TSB fell then bounced back; Alliance and Leicester's share value has slipped; only RBS, with its GBP12 billion rights issue looking strong, can mop the sweat from its brow.

Analysts say the search for badly-needed capital is not meeting with much shareholder enthusiasm. As the UK's housing market falls further and profits decline, banks that have been on autopilot for a decade are now looking at how to survive till the good times - eventually - return.

ENERGY

NEXT month the price of oil will almost certainly hit dollars150 a barrel. Within 18 months it could be dollars200 a barrel. Last Thursday after Israel's transport minister said an attack on Iranian nuclear sites looked "unavoidable", petroleum traders did what they do when uncertainty rears its ugly head - they traded fear for a higher price. Crude oil leapt dollars11.31, the biggest one day gain on record. With US unemployment jumping to 5.5per cent - the biggest rise since 1986 and the highest rate for more than four years - their fears look justified.

The Bank of England says record-high food and fuel prices will push inflation beyond 3per cent.

For household energy bills, that means more pain than the 15per cent rise that occurred during the first quarter of 2008. Electricity - up 63per cent since 2003 - and gas prices are estimated to rise over the next two years. Advanced delivery prices for natural gas this winter are already priced 54per cent more than the utility companies paid at the beginning of the year.

Energy analysts at ING Bank NV in London say firms will also raise prices to cover higher input costs. The result? ING says: "The gas price has gone through the roof." And there's no alternative: electricity for this coming winter is already being traded at double the price of a year ago.

PROPERTY

HOUSE prices in the UK could fall by as much as 20per cent over the coming year.

There are fears the market could go beyond the expectation that a price correction is acceptable, into the far gloomier position of a complete price capitulation where buyers disappear.

A catastrophe? Some analysts think not, pointing out that even a reduction of between 15 to 20per cent, would take average prices back to where they were in 2006. Lack of liquidity among the major mortgage lenders means house prices finding what one bank called "an equilibrium" before 2010.

Sectors of the housing market such as new urban flats, could be looking at a full-scale crash as demand for certain types of homes evaporates. As leading lenders become unwilling to provide mortgages, deals tail off and prices fall. The average fall last month was 2.4per cent, which translates as GBP5000 off the cost of an average home. This is the fastest fall since the early 1990s. Falling demand and prices have left the manufacturing, construction and service sectors struggling, with around 250,000 households now in negative equity. Scotland and the Thames Gateway have been the most resilient areas, but the restricted supply of mortgages means Scotland will not escape .