Tuesday, June 07, 2005

It looks like at least one real-estate dependent economy has crossed over the peak and is slipping down the opposite side of the mountain. In the UK today it's all about
reduced profits, real and expected, [which] 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 consumers.

"There are signs of stress," said Vicky Redwood, an economist at Capital Economics, a consultancy here. "There has been a sharp rise in personal bankruptcies and a rise in mortgage arrears and repossessions. You are starting to see some signs of trouble."

. . . at the core of Britain's economy lies a phenomenon more familiar to Americans than to Europeans - a boom in real estate.
As a card-carrying member in good standing of the Anglosphere, the UK is almost wholly focused on domestic retail spending for economic growth. And as the below graph shows, Nigel and Gemma Consumer have been keeping a tight fist on their pocketbooks this year, and the tie-in to the housing market is unmistakable.
Annual growth in the unadjusted value of retail sales was negative for the first time since May 1967. Average weekly sales in April were �4.6 billion, 0.1 per cent lower than a year ago. The largest falls in sales values over the year were for household goods stores and department stores, at 6.0 per cent and 4.4 per cent respectively.

In turn the British manufacturing sector (what is left of it) is slumping badly and began shedding jobs for the first time in more than a year. Others are warning that up to 150,000 retail jobs are hanging in the balance as well. Talk of interest rates cuts is once again all the buzz, and the Bank of England may begin backtracking on the repo rate as soon as August.

Alan Greenspan still can't figure out why long-term interest rates are so low (and his rhetoric about a 'whole new world' out there should give everyone scary late-90s flashbacks), but the hypothesis that low rates are a signal of future economic weakness seems to be gaining traction. After all, the UK has had an inverted yield curve for some time now . . .


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