Tony Blair inched home to a historic Labour third term in the UK last week. But looking at the changing tempo of the British economy over the last couple of months, you could be tempted to ask: was this a case of ‘just in time’ electioneering?
At the present time there seems to be a general consensus that Blair will back down during this parliament, and that the natural heir apparent is Economics Minister Gordon Brown. However if Blair won the election despite the Iraq war, and thanks mainly to economic prosperity, we could ask ourselves whether changing winds of fortune might not make the heir rather less apparent when the time for handing over actually comes.
Unsurprisingly the Bank of England yesterday kept its minimum lending rate unchanged at 4.75%. I say unsurprisingly since the economic reality of slowing UK growth seems to have long since ended the debate as to whether the next move would be up or down.
In fact looking back over the debate, I don’t seem to have done too badly since in a post back in September I said: “But lets stick my neck out a little: it wouldn?t surprise me if we see no more rate rises this year”. If I was guilty of anything it may only have been in over-anticipating pace of the housing slowdown. (Anyone sufficiently interested in the topic will find that two posts from last August one here, and one here - are still reasonably to the point).
But now it seems virtually undisputed that the UK housing market has brought itself to a running standstill. House prices have apparently only risen 0.3% over the first three months of this year.
More alarmingly U.K. retail sales fell at the fastest rate in at least 10 years last month, according to data from the British Retail Consortium, adding weight to mounting evidence that a slowdown in the housing market is crimping economic growth in what is Europe’s second-largest economy.
The interesting question is what happens next, and how much impact any stagnation or decline will have on the fortunes of the UK economy in general. This is by no means self evident, and the UK situation will need careful watching, not least for the possible international implications.
Links:
A general summary of the state of play with the UK economy can be found here, background info on the housing market here, and here and a summary of a rather alarmist, but by no means impossible, scenario from the bank ABN Amro which was here (but has now gone beyond the great firewall) is reproduced below:
Half a million British jobs will be lost over the next three years because of a “dramatic decline” in consumer spending, a leading investment bank warned yesterday.
A major slowdown would be triggered by falling house prices, higher interest rates, rising unemployment and excessive debt levels, ABN Amro said.
James Carrick, the bank’s UK economist, said the consumer slowdown was set to accelerate, leading to a vicious cycle of lower spending, in turn leading to job losses and fresh spending cuts. He said he was worried the Bank of England would make the situation worse by failing to cut rates in time to prevent a major deterioration.
ABN Amro forecast that about 500,000 jobs would be lost from the retail, manufacturing and construction sectors by 2008. “We expect house prices to fall by 10 per cent by the end of 2006,” Mr Carrick said. “Mortgage approvals are down 35 per cent year-on-year and it is only time before this decrease in demand feeds through to lower prices.”
He said this alone would trigger a direct fall in construction employment of 5 per cent, or about 110,000, from current levels.
He said the “explosion” of household debt - now well above the ?1 trillion mark - had made the economy far more vulnerable to higher unemployment. “Momentum will make things worse,” he said. “For every 1,000 people made redundant, a further 400 jobs could be lost as those newly unemployed workers cut spending.
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May 10th, 2005 at 3:47 pm
I have long had doubts that Brown would take over from Blair - I’d put money on Straw as a possible candidate for the job.
May 10th, 2005 at 3:50 pm
I should have added I agree that the prognosis for the UK economy is not good.
May 10th, 2005 at 5:41 pm
“was this a case of ?just in time? electioneering”
Perhaps it depends on whether the election was about the economy or about something else. Some say it was about the war, others about Tony Blair, yet others about immigration; the very diversity of views on what the election was about suggests partisanship on the part of many of those who express an opinion, but it also implies that it wasn’t all about the economy.
Even if these bad news had arrived two months before election day, plenty of people would have voted on their favourite topic regardless.
Regards,
May 10th, 2005 at 6:08 pm
“plenty of people would have voted on their favourite topic regardless”
Oh, I’m sure. But I still think six months from now Blair might have had a harder time of it.
“the prognosis for the UK economy is not good.”
This raises another interesting question. Lately I’ve had some harsh words for the euro, and to date the UK has benefited from not being in. But this begs the question of the time scale you use to measure ’success’ and ‘failure’.
Recently the UK economy has ‘outperformed’ the other large EU economies, but that doesn’t mean it will always be like that.
May 10th, 2005 at 7:07 pm
Edward,
I think Germany, for example, might currently be wondering if might have been better off outside ERM.
Having said that it is probably fair to say that there will always be times when a country is better off with its own currency, and others when it isn’t. I suspect that over the long term it evens out whichever route is taken. The question of whether to join the single currency, assuming a country can meet the criteria on deficits and inflation etc., is therefore largely a political one.
May 11th, 2005 at 3:20 pm
“The question of whether to join the single currency, assuming a country can meet the criteria on deficits and inflation etc., is therefore largely a political one”.
There are clear theoretical benefits to joining a currency union, including the elimination of transaction costs on currency exchange and stability in the wild world of currency speculation.
What Germany and France and Italy are learning now is that your monetary union can’t be half-hearted - either you give a central bank all the tools it needs to tinker with an economy, or you give them none at all. The moral hazard of letting member states sort of run their own deficits but only in special circumstances which we’ll make up as we go along offers the potential for all sorts of silliness (see Italy).
Regards,