It happened with barely a whimper, with no publication we are aware of noticing it, but in the fourth quarter of last year the UK grew at a faster pace than the US.
The US economy grew at the annualised rate of just 1.1% in the quarter just completed, compared to 4.1% in the quarter before; that’s the slowest rate of growth for three years. But the US Treasury tried to put a positive gloss on the figures, with Treasury Secretary John Snow saying: “The preliminary estimate of fourth quarter 2005 GDP is inconsistent with the underlying strength of the U.S. economy… I would not read too much into today’s numbers. They are somewhat anomalous, reflecting some special factors. They are not consistent with other data on the U.S. economy which paint a picture of good growth.”
The poor figures were party due to a rush of special promotions in the previous quarter; effectively bringing forward spending, and many economists said the figures gave no real cause for concern.
Other are not so sure, with the US rate of interest heading north, the US consumer is in debt, and just like in the UK house prices are overvalued, although the market over there would appear to be around nine months behind the UK market.
It seems to us that central bankers have underestimated the importance of house prices. The Bank of England used to insist that a slowdown in house prices would not impact on consumer spending, but it did. And while it’s possible that the US slow down is just a blip, and normal service will be resumed throughout 2006, it is equally possible the US economic cycle is following the UK, and that just as the consumer lost the ability to prop up the UK, maybe the same too is happening in the US.
Back in the late ’80s, when Nigel Lawson started upping the rate of interest, he said it would not cause serious economic problems; “there would be no recession,” he said. But just as recession followed the interest rate hikes then, economic slowdown followed the much more recent hikes in the UK. It’s not illogical to assume the same will happen in the US. Policy makers don’t seem to get the psychological importance of rising house prices. As house prices go up, we feel richer and credit card borrowing soars.
That’s why talk that house prices will not crash, because you need a recession first, is rubbish. In the Anglo Saxon world, falling house prices cause economic recessions, not the other way round.
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