Is NICE (Non-Inflationary Consistently Expansionary) Over?

Back in June, we noted that the U.K.was foreshadowing the U.S. economy.   

That remains true today: The British economy seems to be about a year or so ahead of us in their economic cycle. Their Real Estate market took off 12 months before ours, and it started cooling long before the U.S. market did. The Bank of England started their rate raising cycle in November 2003 — 7 months before Greenspan & Co. began tightening. And just like in America, British consumers have been going deeper and deeper into debt.

Some in the U.K. are worrying that he NICE decade — Non-Inflationary Consistently
Expansionary — is coming to an end:


click for larger graphic


What does this mean for the Global Economy? Britain’s economy isn’t as large as the U.S., so a slow down there wouldn’t slow the rest of the world. But its a harbinger of things to come: Britain’s economy is the canary in the coal mine for the rest of Europe. Any economic woes there would be an early warning sign of bad things to come for the rest of Europe.

The WSJ observes:

Britain’s economic success during the past 10 years has been a significant driver for some beleaguered European economies to consider changing their tax and labor laws to become more competitive. Looking at rising unemployment rates and anemic economic growth, reform-minded politicians in France and Germany, for example, have pointed to Britain as a possible model for how a larger European economy can compete in a globalizing world.

Further complicating matters — the   Bank
of England is deciding whether to cut (that’s right, cut) interest rates at their next meeting. The Financial Times reports:

are becoming increasingly worried about the outlook for inflation
globally while policymakers’ concerns over risks to price stability
have been clearly reflected in a stream of aggressively hawkish
comments by central bank officials.

The dilemma facing the Bank
of England in deciding whether to cut interest rates in November will
be illustrated clearly next week by some UK economic releases.
Inflationary pressures are mounting while growth momentum is fading
with little suggestion of a pick-up in consumer spending or
manufacturing output in the short-term.

statements by members of the MPC indicate deep divisions. Mervyn King,
governor of the Bank, has said policymakers were surprised by the
consumer spending slowdown and the pick-up in the inflation rate.

More urgent calls for lower interest rates
can be expected if the initial estimate for UK third quarter gross
domestic product proves disappointing on Friday. A weak performance
from the industrial sector and the yawning trade gap means that growth
is expected to slow to just 0.3 per cent – a fifth consecutive quarter
of sub-trend growth.

Slower growth presents a
significant challenge to the government’s finances. Public sector net
borrowing is growing faster than last year and September’s figures on
Thursday could bring cumulative PSNB to £25.6bn at the half way point
of the fiscal year compared with the full-year forecast by Gordon
Brown, finance minister, of £32bn.

In the eurozone, the initial
estimate for consumer price inflation in September at 2.5 per cent
could be revised higher tomorrow following the warning from the
European Central Bank of the need for “strong vigilance” in controlling
inflation expectations.

What does this mean? The decelleration of growth is hitting the U.K., Europe and the U.S. first. So far, it appears that parts of South America and Asia are best positioned to weather this slowdown.

Of course, in the event of a true global recession, even Asia will eventually succumb. My best guess is that they are a year or so behind our cycle . . .


U.K. Tightening Cycle Offers Lesson in Difficulties of Raising Rates, Maintaining Growth
THE WALL STREET JOURNAL, October 17, 2005; Page A2

Bank of England faces dilema over inflation and growth

Chris Flood
Financial Times, October 16 2005 15:50

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  1. Daniel Birch commented on Oct 19

    Hey Barry – I agree with what you are saying except here in the UK we have had 8 years of a Labour Government – who at the margin have been the big employer. In fact if you strip out the increase in Government sponsered jobs over the past 8 years then our real unemployment rate would be close to 10% – that of France and Germany. Whilst I will always be a supply side classical economist, the model has worked – in political terms. 3 clear majorities in 3 elections. However all demand side expansion has to come to an end. That is what is driving the slow down in the UK economy. The Bank of England’s mandate is also slightly different to the Feds – in fact a lot simplier – to keep Inflation at a target rate of 2%. However one parallel you do mention is with the Housing Market. Britains like Americans are home owners and like Americans are affected by Interest rate rises. In fact over here we are more affected by interest rate hikes due to the lack of Fixed Mortgage products in the Market place – something that the US has a distinct advantage with. I think that there might be a slowdown in the US – but be wary about parallels with the UK because structurally there are some very different drivers to Economic expansion.

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