It is no conincidence that the fall in house prices led to a fall in economic growth.
Falling house prices depressess confidence and creates negative equity. It leads to equity withdrawal drying up and consumer spending falling.
Interest Rates
In response to falling house prices, the MPC cut interest rates to try and boost spending. But, even with lower interest rates, people didn’t return to the housing market.
This was a reflection that even cheaper interest rates don’t solve the shortage of finance experienced in the credit crunch.
The Machinery and Equipment Price Index (MEPI) stood at 102.8 (1997=100) in the first quarter of 2009, up 2.1% from the fourth quarter of 2008. The import component index rose 3.0%, while the domestic index increased by 0.4%.
Compared with the first quarter 2008, the total MEPI was up 19.0%, with the import index increasing by 28.4%, while the domestic index rose by 4.8%.
The Canadian dollar lost 2.6% of its value against the US dollar in the first quarter of 2009. Variations in exchange rates can have a strong influence on the MEPI. This is because of the high weight that machinery and equipment imported by industries has, relative to those purchased domestically, in the index.
All industries recorded increases in prices of machinery and equipment purchased in the first quarter. The manufacturing sector (+2.2%) contributed the most to the total MEPI quarterly increase. Among the sector’s subcomponents, the largest contributors to the quarterly increase were transportation equipment manufacturing (+2.3%), primary metal and fabricated metal product manufacturing (+2.1%) and paper manufacturing (+1.8%). The second largest contributor to the total quarterly increase was finance, insurance and real estate (+1.7%).
Among commodities, price increases for other industry specific machinery (+2.7%) and automobiles, excluding passenger vans (+1.9%) were the largest contributors to the quarterly increase. Reviewed by Sandy Hutchens.
