Monday, May 23, 2005

The end of the indefatigable-consumer-and-property-bubble-fueled economic boom in Britain appears to be nigh.
Between 1997 and 2004 - the first seven years of Labour's period in office - the UK consumer did Britain proud. Over this period, consumer spending rose at a robust 3.5 per cent a year in real, inflation-adjusted terms. That's quite a lick. Since 1948, consumer spending growth has averaged a mere 2.6 per cent growth a year. So UK consumers - other than those who are scared of the Bluewater hoodies - have truly never had it so good. . . .

Seven years of feast, you might be tempted to say.

And, as with that first biblically recorded business cycle, perhaps we are now about to get the famine. . . .

John Butler, HSBC's UK economist, estimates that 70 per cent of the jobs created in the UK since 1997 have been directly related to the consumer and property boom, through high-street retailing, banking and construction. The slippage in the housing market, presumably a response to the Bank of England's earlier monetary tightening, may have been the trigger for the latest period of weakness, but we may now be on the verge of a classic downward multiplier, whereby an initial shock leads to weaker consumer spending, lower employment and, hence, even more consumer retrenchment. . . .

Consumers may now, at last, be recognising that their apparent riches are more illusion than reality. Having borrowed on the basis of the dream, they are now waking up to a reality that's more hangover than hope. Asset-price gains can make any of us feel rich. But unless the output comes on stream to justify those gains, our wealth will be no more than a house of cards, a transitory moment of monetary froth.
The recent parallels between the UK and the US are significant -- rampant consumption growth, housing bubbles, huge trade deficits -- not to mention the larger structural similarities as the two signature products of the Reagan-Thatcher revolution.

One big difference has been the two countries' interest rates, both level and direction. Current the Bank of England has rates at 4.75% while the Fed has just recently made it up to 3.0%. In mid-2004 the BoE was at 4.5% while the Fed was still pumping up the volume with its 1.0% offer. Finally, the BoE has kept rates stable since August 2004 over which time the Fed has raised rates seven times by a cumulative 175 basis points.

At the same time, it might simply be that the Fed is operating in sync with the BoE but with a time lag. All indications are that the BoE has topped out and may even start dropping rates if economic conditions in Britain really turn southwards. The continuing housing bubbles across the US will keep the Fed wary, but how long can they go on? We know from recent IMF research that housing bubbles are now global -- and the evidence is pretty solid that the bubble has at least fully deflated in the UK -- if not on the verge of bursting.
U.K. house prices dropped for the 11th straight month in May, Hometrack said, adding to concerns that higher borrowing costs are sapping demand for property. . . .

``The forecast for the next couple of months looks set to remain dreary,'' said John Wriglesworth, Hometrack's housing economist. ``The ongoing market malaise has caused us to revise our house price forecast for 2005 from 3 percent to 0 percent.'' . . .

The bank cut its U.K. economic growth forecast on May 11 and Governor Mervyn King said that house-price inflation has ``fallen markedly,'' fueling speculation the next move in rates may be down. Sluggish home prices mean fewer people are moving or borrowing against the value of their homes, slowing consumer spending.

A report from the Royal Institution of Chartered Surveyors On May 17 said house prices fell in April, while sales in the market were 30 percent lower than a year earlier. U.K. mortgage lending last month grew the least since February 2002, the British Bankers' Association said on May 20.
The first sign of the end of the bubble is markedly falling sales volume, and we're already beginning to see that in California and Nevada. How much longer until this UK story can be written for the US?

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