U.K. foreshadowing U.S. Economy

"The sheer scale of consumer debt has made millions of households
extremely vulnerable to shocks in the economy, both from fiscal
mismanagement and external factors such as oil price rises, acts of
terrorism and wars. Debt is a time bomb which could be triggered by any
number of shocks to the economy, at any time."

No, the author is not talking about rising U.S. consumer debt. Rather, that quote is from a report led by Lord Griffiths of Fforestfach of Great Britain’s Conservative Party, concluding that banks had made credit too easily
available, and personal debt was becoming a problem
for 15 million Britons.

Previously, the one bright spot in Europe had been the UK’s robust economy. Now, we see signs that even their retail sector is starting to sputter from consumer exhaustion:

"In grim procession, some of Britain’s best-known retailers –
from Boots to Marks
& Spencer
– have lined up recently to report or warn of lower profits.
But these days, the gloom has an impact far beyond the dwindling profits from
sales of digital cameras at Jessops or food at Sainsbury’s.

The reduced profits, real and expected, may be signs of a significant
slowdown in an economy that has distinguished itself from the sluggish ones in
Continental Europe through reliable growth – most of it driven by free-spending

Like the U.S.,the British
economy has lost industrial jobs and seen a rise in their
service industry. And that includes (in a big way) retail.

The NYT notes too that "retail spending has taken over as the engine of growth,
when personal debt has soared and when the government, bucking its own advice to
the rest of Europe, has made its spending a bigger proportion of the overall

Sound familiar?

The similarities don’t end there; there’s this:  Britain’s economy has been enjoying a substantial boom in real estate. And that in turn has caused their Central Bank to tighten rates:

"The credit-driven boom persuaded the Bank of England to raise interest rates
from a low of 3 percent to 4.75 percent, their level for the last nine months.
Now the higher rates are biting on the debt the spending has produced, turning
spendthrifts, in some cases, into paupers.

In one sign of the slowdown, the British Bankers’ Association said that the
number of mortgages initiated in February was down 35 percent from a year ago
despite other signs that a slowdown in the housing market might be ending. Not
only that, according to the British Retail Consortium, retail sales in April
fell by 4.7 percent compared with April 2004.

The slide brought "the most difficult trading conditions in living memory,"
said Kevin Hawkins, the director general of the consortium. Just last week, the
Office for National Statistics said that the economy grew just 0.5 percent in
the first quarter, the slowest in two years."

What’s the next likely step? A few economists are forecasting that the Bank of England will "begin to ease
rates this summer or in the fall. Some economists are forecasting that the
benchmark rate will decline to 4 percent by the end of this year, and fall
further in 2006.

From overstimulated economy to faltering in a few short years. Don’t be surprised if America’s slowing economy follows a similar path:  The Fed, hoping to avoid a bubble in Real Estate (having missed the stock bubble) continues raising rates, ending their tightening cycle this Autumn. Menawhile, the economy slides further into anemic growth. Fearing a recession in late 2006-07, the Fed reverses themselves. By early Spring 2006, the Fed may be cutting rates to try to stimulate our economy.

Of course, not everything is parallel — some things are mirror images: The party of Left, led by Tony Blair, supported the U.S. invasion of Iraq, while the party of the Right, including people like Lord Griffiths of Fforestfach, are in favor of fiscal discipline and balanced budgets. (Hey, they drive on the left side of the road over).

Despite these differences, Britain may be foreshadowing our future.

While many economists have been scanning for signs in China of a slowdown in the global economy, that may be the wrong place to watch. We’ve long looked to England to know what’s going to happen next in the U.S. culturally  — in terms of music, theatre and fashion. Now, it seems, we are even looking to them economically.

Special relationship, indeed.


Britain Showing Signs of a Slowdown
NYT, June 7, 2005

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What's been said:

Discussions found on the web:
  1. touche commented on Jun 10

    Unless they’re stupid (a real possibility), Greenspan et al realize that the UK’s fate is likely to be our own. But they’re also hoping and praying for a miracle of economic prosperity to offset all the debt that households have accumulated. Without such a miracle, Americans will be mired in debt for decades to come.

  2. bubblesphere commented on Jun 10

    We will be saved by the super rich investing in our economy.

    Supply sider George Bush gave them money because he believed they would turn around and invest it in America. His whole economic policy is built around this central point. They will build new factories and create new jobs and we’ll all be richer.

    Britain doesn’t have enough rich people. That’s there problem.

  3. mb commented on Jun 10

    Re: Real Estate – when I lived/worked in England 15 yrs ago, all mortgages were arms, and I believe that’s still the case. We’re still the only nation I know that has predominantly fixed mortgage rates (’til lately).

    Look at the housing bubbles in UK, Australia, Ireland, etc and they’re all much more susceptible to rising rates…

    (My San Diego neighbor just sold his condemned 950 sq foot house for $1.2MM – that’s expensive sand! – but hey, it’s less than a mile to the beach…)

  4. scorpio commented on Jun 10

    let’s see what our markets, economy, 10-yr bond and housing bubble look like w 4.5% rate like UK instead of 3 up from 1, it will be a DISASTER. and i’m not even talking about rates as high as 6.5% which Greenie shoved down our throats in ’00 (when inflation was approx the same as now), ostensibly to burst the bubble (which he claimed didnt exist) but more likely to induce market crash and recession so his Republican buddies could finally rule the world

  5. Rawdon commented on Jun 12

    Hi Barry.

    read your piece on the UK economy (/UK foreshadowing/ etc) and wanted to make a comment or three.

    Retailing has long been an accident wainting to happen. My writing partner, based in the UK, has been forecasting this since January based simply on high numbers of shop vacanies in the highstreet following a period of overambitious shop openings and sticky rent demands from landlords.

    It’s worth, though, pointing out that although the wholesaling/retailing sector is important, it is actually less than 16% of gross value added at £146.3b (GDP industry analysis here from 2002 data, latest available in this form), and a shade less than manufacturing’s contribution of £147.5b. Financial/business services represents £282.4b. So maybe there is a slight risk of overemphasising a wholesale/retail slowdown as a vulnerability of the UKs service sector orientation when w/retail represents little more than a third of total services.

    Also, Boots and M&S are not the best examples of retail slowdown (although the general point of a retailing nightmare is 100% valid). Boots’ core pharmacy goods and services are being hit harder by competitors like Superdrug (yes, there really is a chain of shops called that) than by a slowdown in consumer spending. For its part, M&S is indeed being hit by poor consumer spending, but also has serious structural issues that aggravate the effect considerably. This provides some background: http://alzahr.blogspot.com/2004/07/marks-spencer-should-we-care.html

    Finally, and at the risk of boring you into voluntary euthanasia, this first two BoE charts on this link put into context much of the consumer spending/property boom points your post makes: http://alzahr.blogspot.com/2004/12/investing-2005-uk-outlook.html



  6. Rawdon commented on Jun 13

    Hi again Barry.

    A small reply to mb above. Variable rate loans (ARMS to you guys) were not the only mortgage available 15 years ago in the UK. Fixed rate loans were still more dominant perhaps due to the wide variation in lending rates in the preceeding 3 decades (average, from memory, 11% +- alot). Most buyers liked to fix to avoid surprises.

    However, from about that time there was a noticeable rise in loan types available. The early 1990s just happens to be the era when I was buying an apartment in London and I well remember my bewilderment at the available loan types on offer coming to market along side the more traditional fixed option.

    It is the case that loan offerings in the UK now capture just about every imaginable permutation possible from fixed, to discount variable, to straight variable, capped discount variable etc etc. The result has been regular re-fi activity to constantly enjoy the best deal (“rate-tarts” in local-speak). This has been the downfall of fixed’s dominance.


  7. Tony Hammond commented on Jul 1

    M&S are losing clothes sales to the supermakets, who are nearing thier quality, and Boots are also losing thier market dominance to more efficent operators.
    There has been a fall in retail sales but its been hyped to death as everything is. The fact is wages are rising at 5%+ in the UK, but taxes seem to be rising faster.
    For instance, the bill for local services has risen from £750 in 1997 to £1250 in 2005. Thats a rise of 70% over a few years, and is equivalent to paying nearly $2700 to the local municpality.

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