Still looks to me like the govt deficit is plenty high enough to support at least modest gdp growth until the pro active austerity measures actually reduce it.
UK Headlines:
U.K. Service Industries Return to ‘Pre-Snow’ Growth
Inflation Could Force Bank of England to Raise Interest Rates, Says Deputy Governor Charlie Bean
UK Faces US-style Jobless Recovery, Says Institute for Fiscal Studies
Wealthy Britons Planning to Increase Spending in 2011, HSBC Says
Might be secretly worried about the relatively strong currency.
Many of them still think rates matter for the level of their currency even though the BOE research says they don’t matter.
>
> (email exchange)
>
> On Tue, Sep 15, 2009 at 5:34 AM, Dave wrote:
>
> BOE King states that BoE will look at reducing deposit rate on reserves
>
> Front end rallies, 1*1 at 2.565% currently, had traded as high as 2.68%
> prior to announcement
>
[top]
(email exchange)
> On 12/3/08, Kevin wrote:
>
> Hi Warren,
>  
> The UK deficit and debt to GDP is increasing dramatically as the government
> seeks to stabilize the economy.
>
Yes, good move on their part. That will restore demand/output/employment.
>
> With the UK being a net importer of goods.
>
Yes.
>
> And sterling not benefitting from being a “reserve” or “commodity based
> price” currency.
>
Whatever that means with floating FX.
>
> What impact does the increased reliance on foreign based capital as a funding
> source for the government.
>
The government is not reliant on foreign based capital with it’s currency of issue. It spends first by crediting accounts at its own central bank, the offers those accounts interest bearing alternatives like guilts, etc..
>
> have on the price of sterling and gilt yields in the medium term?
>
The currency could go down relative to other currencies. It’s sure looked way over valued to me for quite a while. Even at one to one with the dollar prices would still be high there.
>
> Ask this question as it appears foreign investors are beginning to question
> whether the UK, with its huge reliance on the financial services industry, very
> low domestic savings ratio and a consumer that has incurred residential
> property debt levels dramatically in excess of those in the US, should be
> compared to Iceland and may suffer similar consequences if there was a
> dramatic loss of confidence in the UKs economic prospects.
>
Iceland’s problems are with external currency debt, and with a govt that doesn’t know how to best deal with private sector external currency issues.
>
> Many thanks
>
> Kevin
>
[top]
Highlights
| U.K. Home Prices Drop as Economy Nears `Abyss,’ Rightmove Says |
| U.K. Mortgage Lending Declines to Lowest Since 2005, CML Says |
| Economy in recession, says E&Y |
| Darling to ‘reprioritise’ spending |
| U.K. Deposit Fund Pays 3 Billion Pounds for ING Iceland Savers |
Very constructive move here- front loading future public sector capital expenditures.
Darling to ‘reprioritise’ spending (FT)
Alistair Darling evoked the spirit of John Maynard Keynes on Sunday as he signalled a “reprioritising” of spending plans towards capital infrastructure, housing and energy. The chancellor of the exchequer will call on departments to bring forward billions of pounds of capital expenditure to invigorate the economy ahead of an expected recession. The government is limited in its ability to step up overall spending for the current three-year period, set at the last comprehensive spending review. But it can bring forward money from planned budgets in 2010-11 – after the next general election. The government has already announced the front-loading of money to build more social housing as part of its autumn relaunch. It has also allowed the Ministry of Defence to sign off its £4bn aircraft carrier contracts by juggling its budget.
[top]
Highlights:
| BoE Cuts Growth Forecasts, Jobless Climbs |
| U.K. Unemployment Rose the Most Since 1992 in July |
| Surge in credit card debt charge-offs |
| U.K. Homebuilders Fall as Unemployment Rise May Worsen Slump |
Article snip:
BoE Cuts Growth Forecasts, Jobless Climbs (Bloomberg) The BoE cut its forecast for U.K. economic growth and held out the prospect of lower interest rates as unemployment rose the most in almost 16 years in July. Governor Mervyn King said the inflation rate will fall below the 2 % target in two years if policy makers keep the benchmark interest rate at 5 %.
But not if they cut is the implication as well.
[top]
Highlights:
| ECB Leaves Interest Rates at Seven-Year High to Fight Inflation |
| German industrial orders drop |
| Western European Car Sales Fall by 6.7% in July, JD Power Says |
| German June Exports Rise the Most in Nearly Two Years |
| German Economy Contracted as Much as 1.5% in 2Q |
| French Trade Deficit Expands to Record as Euro Curbs Exports |
| Italian June Production Stalls as Record Oil Prices Damp Growth |
| Fall in output fuels Spanish recession fears |
Article snip:
ECB Leaves Interest Rates at Seven-Year High to Fight Inflation (Bloomberg) – The ECBkept interest rates at a seven-year high to fight inflation even as evidence of an economic slump mounts. ECB policy makers meeting in Frankfurt left the benchmark lending rate at 4.25 %, as predicted by all 60 economists in a Bloomberg News survey. The bank, which raised rates last month, will wait until the second quarter of next year to cut borrowing costs, a separate survey shows. The ECB is concerned that the fastest inflation in 16 years will help unions push through demands for higher wages and prompt companies to lift prices. At the same time, record energy costs and the stronger euro are strangling growth. Economic confidence dropped the most since the Sept. 11 terrorist attacks in July and Europe’s manufacturing and service industries contracted for a second month. ECB President Jean-Claude Trichet will hold a press conference 2:30 p.m. to explain today’s decision.
Same as UK, less costly to address inflation now rather than support growth and address inflation later if it gets worse.
It’s been said in the US that the Fed needs to firm up the economy first, and then address inflation. To most Central Bankers this makes no sense, as they use weakness to bring inflation down.
In their view that means the Fed wants to get the economy strong enough to then weaken it.
The Fed majority sees it differently.
They agree with the above.
However, for the last year they have been forecasting lower inflation and lower growth were willing to take the chance that supporting growth would not result in higher inflation.
Now, a year later, the FOMC is faced with higher inflation and more growth than the UK and Eurozone, and systemic ‘market functioning’ risk remains.
The FOMC continues to give the latter priority as they struggle with fundamental liquidity issues that stem from a continuing lack of understanding of monetary operations.
[top]
(an email exchange)
>
>
> On Wed, Aug 6, 2008 at 12:25 AM, Prof. P. Arestis wrote:
>
> Dear Warren,
>
> Just received the piece below. The situation over here is getting
> worse but pretty much as expected.
>
> Recession signalled by key indicators of British economy
>
>
> Best wishes, Philip
>
Dear Philip,
Yes, seems tight fiscal has finally taken its toll and is now reversing the ugly way – falling revenues and rising transfer payments.
Without support from government deficit spending, consumer debt increases sufficient to support modest growth are unsustainable.
And with a foreign monopolist setting crude oil prices ‘inflation’ will persist until there is a large enough supply response,
It’s the BoE’s choice which to respond to, though ironically changing interest rates is for the most part ceremonial.
All the best,
Warren
[top]
U.K. Mortgage Approvals Drop to Least Since 1999
By Jennifer Ryan
(Bloomberg) U.K. mortgage approvals dropped in December to the lowest in at least nine years, and consumer credit fell, threatening the outlook for economic growth.
Lenders granted 73,000 loans for house purchase, down from 81,000 in November and the least since records began in January 1999, the Bank of England said in London today. The median forecast in a Bloomberg News survey of 24 economists was 79,000. Lending on personal loans and overdrafts fell to 265 million pounds ($530 million), the least in 15 years.
Banks are tightening credit standards after contagion from the U.S. subprime mortgage market collapse, the Financial Services Authority said yesterday. Less access to credit for Britons with record debt may further slow consumer spending and a weakening housing market, adding to the case for an interest rate reduction by the Bank of England as soon as next week.
“The household sector was clearly under some kind of pressure at the end of 2007,” James Shugg, an economist at Westpac Banking Corp. in London, said in an interview on Bloomberg Television. “The U.K. housing market is embarking on a much slower growth period.” He predicted further interest rate reductions after a quarter-point cut last month.
In a separate statement, Prime Minister Gordon Brown reappointed central bank Governor Mervyn King to serve another five-year term. King accepted the position, saying in a statement that he looks “forward to working hard with my bank and MPC colleagues on the economic and financial challenges that face us all.”
Consumer Credit
The central bank’s report today showed consumers borrowed less on unsecured credit as they faced repaying a record 1.4 trillion pounds in debt and banks curbed lending to them. Net consumer credit fell to 557 million pounds in December, less than half the previous month’s total.
“A significant minority of consumers could experience financial problems because of their high levels of borrowing,” the FSA, the U.K.’s financial regulator, said in its risk outlook report yesterday. “A growing number of consumers are likely to experience debt repayment problems in 2008.”
The average cost for a fixed-rate mortgage maturing in the next 12 months and switching to a variable rate will rise by about 210 pounds per month, creating a “serious impact on the affordability of the loan,” the FSA said. The increase will affect about 1.4 million home loans.
Subprime Losses
Britons face higher home loan costs after banks around the world posted at least $133 billion in losses from the collapse of the U.S. subprime mortgage market.
The average rate offered by lenders on a mortgage for 95 percent of the price of a property, fixed for 24 months, rose to 6.53 percent in December from 6.44 percent, the central bank said Jan. 10. The central bank’s credit conditions survey showed banks plan to limit access to all debt in the first quarter.
“There is a risk that some consumers could find it difficult to meet their credit commitments due to tighter lending standards for both secured and unsecured credit,” the FSA said.
All 30 economists in a Bloomberg News survey forecast the Bank of England will cut interest rates a quarter point to 5.25 percent on Feb. 7 as growth slows and the housing market stalls.
U.K. retail sales rose at the slowest pace in 14 months in January, the Confederation of British Industry said yesterday.
House prices fell for a fourth month in January, Hometrack Ltd. said Jan. 28. U.K. real estate professionals said December was the worst month for the housing market since the aftermath of Britain’s last recession in 1992, according to a Jan. 16. report by the Royal Institution of Chartered Surveyors.
♥
States the issues clearly:
King Says U.K. Inflation May Match Fastest Pace in a Decade
(Bloomberg) Bank of England Governor Mervyn King said inflation may match the fastest pace in at least a decade this year and require an explanation to the Treasury, a sign that policy makers have limited scope to cut interest rates.
“It is possible that inflation could rise to the level at which I would need to write an open letter of explanation, possibly more than one, to the chancellor,” King said in a speech today. “To put it bluntly, this year we are probably facing a period of above-target inflation and a marked slowing in growth.”
♥