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U.K. foreshadowing U.S. Economy

Posted By Barry Ritholtz On June 10, 2005 @ 6:42 am In Economy | Comments Disabled

"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 [1] 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 [2] 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 [2]
NYT, June 7, 2005

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/06/uk-foreshadowing-us-economy/

URLs in this post:

[1] Lord Griffiths of Fforestfach: http://www.isc-symposium.org/ISC/cv_lord_griffiths_of_fforestfach.pdf

[2] NYT: http://www.nytimes.com/2005/06/07/business/worldbusiness/07brit.html?ex=1275796800&en=4725e2278617e48d&ei=5090&partner=rssuserland&emc=rss

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