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The reason why households are apparently continuing to spend in spite of bad news is the subject of some debate. But Mr Saunders argued consumers could only justify continued spending if they believed that rising inflation, falling house prices and slow wage growth were temporary.
"Much like the US, the British economy is characterised by considerable domestic financial imbalances - over-extended consumers, a profligate government and a large current account deficit," wrote economists at Lombard Street Research in a recent note.
Meanwhile, inflation is rising, house prices falling and wages are stagnant, all considered triggers for belt-tightening. But "nobody seems to have mentioned this to the UK consumer", the note added.
Earlier this year, members of the Bank of England's rate-setting Monetary Policy Committee described spikes in oil and commodities inflation as temporary factors that had to work their way through the economy.
But there is widespread scepticism that this is the case, particularly with oil prices continuing to rise.
The low savings data looks unsustainable to economists, with most expecting consumers to start hoarding.
"The real issue is not whether the savings ratio goes up, but how quickly," said Robert Barrie, economist at Credit Suisse. If it happens quickly - 12 months or less - the impact could be destabilising.
In the last deep recession in the early 1990s, national savings rates peaked at 13.5 per cent in the first quarter of 1991 as rising unemployment and falling house prices caused consumers to stash their cash.
Many policy makers and bankers said the credit mess was contained.
Boy, were they wrong. More than a year after the crisis first flared, the U.S. financial industry, and with it the broader economy, seems to be caught in a vicious circle.
As home prices sink, Americans are falling behind on their mortgages in growing numbers. As more homeowners run into trouble, banks must write off even more loans. And as the bad loans mount, financial companies are increasingly unable or unwilling to extend credit, making it even harder to buy homes or expand businesses.
This process is playing out painfully on Wall Street, where on Monday the stock market rounded out its worst 12-month run since the spring of 2003, when the United States invaded Iraq and the market was beginning a tenuous recovery from the bursting of the technology bubble.
The Standard & Poor's 500 is down 12.8 percent for the first half of the year. The index just had its worst June (down 8.6 percent) since 1930 (down 16.5 percent).
The Dow Jones industrial average is off 14.4 percent for the first half of the year. Financial shares keep falling. Even as the broader market posted a small gain Monday, shares of banks and brokerage firms in the S&P 500 fell 2.1 percent, to a five-year low.
The share price of Lehman Brothers, which has been struggling to persuade investors that it can survive as an independent firm, fell 11 percent Monday, bringing its loss for the year to nearly 70 percent.
"Eventually, the financial sector's troubles will be communicated to the rest of the economy," said Douglas Peta, market strategist at J&W Seligman in New York. "As there is less investment available that restrains consumer spending, it restrains corporate spending."
One measure already signals that the woes of the financial system are straining the economy. In the last 13 weeks, total bank loans, leases and securities holdings have fallen at an annual rate of 9.1 percent, its fastest decline since 1973, when the data was first collected, according to Jan Hatzius, chief domestic economist at Goldman Sachs.
Even as the Federal Reserve and the government have tried to reinvigorate the economy with lower short-term interest rates and tax rebates, rates on mortgages and corporate loans have risen to their highest levels this year.
Until recently, "we haven't had the sense that we had the downward spiral in anything other than housing," said Jane Caron, chief economic strategist at Dwight Asset Management, a bond-trading firm based in Burlington, Vermont. "What I am worried about is that we are headed in a direction where those negative feedback loops expand and intensify."
That cycle will not be broken, Caron and other analysts say, until the decline in home prices slows significantly or ends, allowing the market to tally the full cost of the recent credit binge and restoring confidence among bankers and investors.
Some analysts see tentative signs that the fall in housing may be ebbing. Sales of existing homes have flattened in recent months and home prices fell a little less in April than they did in March on a month-over-month basis. But both trends could easily reverse, as they have after previous upswings.
"We could reach a bottom in housing at the end of this year and have some growth in the second half of 2009," Caron said, "but that requires the economic backdrop to remain no worse than it currently is."
Another strain on the economy and markets is the rapid rise in the prices for energy, food and other commodities. Crude oil prices are up about 51 percent this year and corn prices are up 55 percent. That increase in raw material prices is one reason that fast-growing markets like China and India - which are increasingly dependent on energy imports - have taken a beating in recent months.
For the American markets, the rise in prices is certainly important, but spending on energy and food makes up a relatively small part of the average family's income. Much more important, analysts say, is the ability to borrow money to buy homes and expand businesses.
In addition to paying higher interest rates, borrowers are also dealing with more restrictive lending standards. Recently, Fannie Mae, for instance, tightened its rules for real estate investors buying multiple homes, which the owners typically rent out. In the past, the company allowed investors to borrow against up to 10 properties. Now, it limits them to four.
"That immediately knocked out a large supply of people who were prepared to buy these homes," said Lou Barnes, a mortgage broker based in Boulder, Colorado, referring to foreclosed or vacant homes. He added, "The main reason for suppressed prices of homes is the difficulty of financing them."
Those tougher conditions may remain in place for a while. The financial system is being forced to undo the excesses of recent years and return to a more sustainable level of debt in the economy, said Marc Stern, chief investment officer at Bessemer Trust, an investment firm in New York.
"This is not just another cycle," Stern said. "It's the end of a period of rampant leverage and lax lending standards, and that takes a bit of time to work through."
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At Midyear, the Economic Pain Persists
Many policy makers and bankers said this credit mess was contained.
Boy, were they wrong. More than a year after the crisis first flared, the financial industry, and with it the broader economy, seems to be caught in a vicious circle.
As home prices sink, people are falling behind on their mortgages in growing numbers. As more homeowners run into trouble, banks must write off even more loans. And as the bad loans mount, financial companies are increasingly unable or unwilling to extend credit, making it even harder to buy homes or expand businesses.
This process is playing out painfully on Wall Street, where on Monday the stock market rounded out its worst 12-month run since the spring of 2003, when the United States invaded Iraq and the market was beginning a tenuous recovery from the bursting of the technology bubble.
The Standard & Poor's 500-stock index is down 12.8 percent for the first half of the year. The index just had its worst June (down 8.6 percent) since 1930 (down 16.5 percent).
The Dow Jones industrial average is off 14.4 percent for the first half of the year. Financial shares keep falling. Even as the broader market posted a small gain on Monday, shares of banks and brokerage firms in the S.& P. 500 fell 2.1 percent, to a five-year low.
Lehman Brothers, which has been struggling to persuade investors that it can survive as an independent firm, fell 11 percent Monday, bringing its loss for the year to nearly 70 percent.
"Eventually, the financial sector's troubles will be communicated to the rest of the economy," said Douglas M. Peta, market strategist at J.& W. Seligman and Company in New York. "As there is less investment available that restrains consumer spending, it restrains corporate spending."
One measure already signals that the woes of the financial system are straining the economy. In the last 13 weeks, total bank loans, leases and securities holdings have fallen at an annual rate of 9.1 percent, its fastest decline since 1973, when the data was first collected, according to Jan Hatzius, chief domestic economist at Goldman Sachs.
Even as the Federal Reserve and the government have tried to reinvigorate the economy with lower short-term interest rates and tax rebates, rates on mortgages and corporate loans have climbed to their highest levels this year. The average interest rate on a 30-year fixed rate home loan was 6.45 percent last week, up from 6 percent at the start of the year. Investment-grade corporate bonds are yielding 6.2 percent, up from 5.7 percent at the start of the year.
Until recently, "we haven't had the sense that we had the downward spiral in anything other than housing," said Jane Caron, chief economic strategist at Dwight Asset Management, a bond-trading firm based in Burlington, Vt. "What I am worried about is that we are headed in a direction where those negative feedback loops expand and intensify."
That cycle will not be broken, Ms. Caron and other analysts say, until the decline in home prices slows significantly or ends, allowing the market to tally the full cost of the recent credit binge and restoring confidence among bankers and investors.
Some analysts see tentative signs that the fall in housing may be ebbing. Sales of existing homes have flattened in recent months and home prices fell a little less in April than they did in March on a month-over-month basis. But both trends could easily reverse, as they have after previous upswings.
"We could reach a bottom in housing at the end of this year and have some growth in the second half of 2009," Ms. Caron said, "but that requires the economic backdrop to remain no worse than it currently is."
Another strain on the economy and markets is the rapidly rising prices for energy, food and other commodities. Crude oil prices are up about 51 percent this year and corn prices are up 55 percent.
That surge in raw materials is one reason that fast-growing markets like China and India — which are increasingly dependent on energy imports — have taken a beating in recent months. The Shanghai stock market is down 48 percent for the year, and the Nifty index in India is down 34 percent. By contrast, markets in Russia and Brazil, which are big exporters of commodities, are essentially flat for the year.
"The emerging markets are associated with higher commodity prices, but not all emerging markets are beneficiaries," said Simon Hallett, chief investment officer of Harding Loevner Management, an investment firm based in Somerville, N.J. "Russia and Brazil are commodity producers, but China and India are commodity consumers."
For the American markets, the rise in prices is certainly important, but spending on energy and food makes up a relatively small part of the average family's income.
Much more important, analysts say, is the ability to borrow money to buy homes and expand businesses.
In addition to paying higher interest rates, borrowers are also dealing with more restrictive lending standards. Recently, Fannie Mae, for instance, tightened its rules for real estate investors buying multiple homes, which the owners typically rent out. In the past, the company allowed investors to borrow against up to 10 properties. Now, it limits them to four.
"That immediately knocked out a large supply of people who were prepared to buy these homes," said Lou Barnes, a mortgage broker based in Boulder, Colo., referring to foreclosed or vacant homes. He added, "The main reason for suppressed prices of homes is the difficulty of financing them."
Those tougher conditions may remain in place for a while. The financial system is being forced to undo the excesses of recent years and return to a more sustainable level of debt in the economy, said Marc D. Stern, chief investment officer at Bessemer Trust, an investment firm in New York.
For instance, the percentage of equity Americans have in their homes fell below 50 percent for the first time last year, from more than 60 percent in the early 1990s. In the first quarter, homeowners' equity had dwindled to 46.2 percent.
"This is not just another cycle," Mr. Stern said. "It's the end of a period of rampant leverage and lax lending standards, and that takes a bit of time to work through."
World oil supplies will be tight until 2013: IEA
LONDON — World oil supply will rise more slowly than expected by 2013, leaving little spare capacity on the market despite weaker demand growth, the International Energy Agency said on Tuesday.
In its Medium-Term Oil Market Report, the energy adviser to 27 industrialized countries said global supply capacity will reach 95.33 million barrels per day (bpd) by 2012, 2.7 million bpd less than its previous forecast a year ago.
The outlook comes as supply concerns and robust demand in Asia and the Middle East have helped drive crude oil prices to record highs above $140 (U.S.) a barrel, adding a strain to the world economy.
"Structural demand growth in developing countries and ongoing supply constraints continue to paint a tight market picture over the medium term," the Paris-based IEA said.
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High prices and slower economic growth are expected to weigh on world demand, although it is forecast to expand faster on average than additions to global supply in the next five years.
Consumption will rise by an average 1.6 per cent a year between 2008 and 2013, or some 1.5 million bpd on average, the IEA said. That is down from a previous medium term forecast of 2.2 per cent.
Annual supply growth will match or exceed that level through 2010 but slow to less than 1 million bpd from 2011 to 2013. Average total supply growth in the period stands at 1.15 million bpd a year.
The IEA also said additional global refining capacity over the next five years would lag expectations, adding to the challenge of meeting rising demand for diesel and other distillate fuels.
Additions to capacity by 2012 are 1 million bpd less than last year's forecast.
Accelerated declines at mature oil fields and long delays and cost overruns at new projects account for the lower supply growth forecast.
The IEA, which has been steadily lowering its forecast for world oil demand during 2008 due to high prices and slowing economies, said the size of the cut to supply was unexpected.
"We thought we would be seeing lower demand, but what surprised us is the scale of the supply revision," said Lawrence Eagles, head of the IEA's Oil Industry and Markets Division and editor of the report.
"Despite the demand revision, we still end up with a similar picture to that of a year ago."
The IEA's previous medium term report said there was a risk of a supply crunch developing in the period to 2012.
Output in 2012 from outside the Organization of the Petroleum Exporting Countries, source of about three in every five barrels, is now expected to be 1.4 million bpd less than previously thought.
Supply will rise to 51.1 million bpd in 2013 from 49.9 million bpd in 2008, the IEA said. Output of non-OPEC crude alone will remain flat or fall in the next five years.
Production capacity in OPEC countries, also facing cost overruns and delays at new projects, is also expected to lag earlier expectations.
OPEC usually holds part of its production capacity in reserve to make up for supply breaks or to meet unexpected rises in demand. That margin is expected to wane by the end of the period.
The group's effective unused production will rise from 2.5 million bpd in 2008 to more than 4 million bpd in 2009, before declining again in 2013 to about 1 million bpd, the IEA said.
"Spare capacity is likely to dwindle to minimal levels by 2013 in the absence of accelerated supply-side investment or further efforts to stem demand growth," it said.
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