So, it seems certain the US is in recession (although we won’t have confirmation for a while – official figures relating to this quarter won’t be out for several months). The question then has to be, what does this all mean for the UK?
Traditionally, the UK cycle has followed between 12 and 18 months behind the US, so actually one would expect the news relating to the British economy to mirror US news released at the beginning of last year. In other words the tough time for the UK is still ahead of us – and if recession for the UK is on the cards, don’t expect it until 2009.
One thing is for sure, the US experience gives the lie to the argument you need a recession to cause house prices to fall. In the US, the relationship was precisely the other way round – falling house prices led to a stalling economy and now falling employment.
The UK has certain advantages and disadvantages over the US. The UK has not experienced the extent of subprime borrowing seen in the US – that’s the good news. But on the other hand, we have still had subprime borrowing, and anecdotal evidence suggests some lending was bordering on the irresponsible.
The UK has, until recently, seen 125 per cent mortgages – courtesy especially of Northern Rock, so that seems a bit dodgy. The average British consumer is more indebted than the average consumer in the US, with the debt-to-income ratio in the UK in 2006 – 1.23, compared to 1.16 in US. Yet the US enjoys a higher wealth-to-debt ratio – 2.52 in the US, to 2.18 in the UK in 2006 – or so says data from NIESR.
Average house prices are also much lower in the US. So, by some measures at least, the UK is even more vulnerable than the US.
Recently, the UK’s current account deficit as a percentage of GDP became even greater than the deficit in the US.
One thing that is worth bearing in mind, however, is that while at the moment the British government is getting hammered over the fiscal deficit – and as a percentage of GDP borrowing, at the moment it is far too high – it is worth bearing in mind that our total net government debt as a percentage of GDP is actually quite modest – 38.5 per cent of GDP in 2006, compared to 61.4 percent in the US, says data from NIESR.
But the real blow to the UK comes in the form our disposable income.
According to new figures from Unbiased.co.uk, we now have to work the first 70 days of the year just to earn enough money to service interest on our credit card and loan debt, let alone re-paying the actual debt itself.
Unbiased.co.uk have christened 10th March as debt freedom day – the bad news, last year debt freedom day was 1 February and, according to the web site, personal loan levels in the UK increased to £9.8 billion, from £2.6 billion last year. At the same time, average interest rates on personal loans are now 0.5per cent higher, which means that Brits pay almost £1.5 billion in interest payments alone.
Meanwhile, this morning, uSwitch revealed the latest report to suggest that after paying bills we are getting worse off.
It has calculated that the average household forks out £21,495 on petrol, energy, food, mortgage payments, car insurance, water, public transport, council tax, cigarettes and alcohol, which is 9 per cent up on 2007, yet average wages rose only by 3.4 per cent.
Actually, the uSwtich report is a little misleading, because it takes into account items that have risen rapidly in price, and ignores items, such as clothes and furniture, that have fallen in price.
Even so, even if you take everything into account, the Office for National Statistics has the retail price index rising at 4.1 per cent in January, while average earnings, including bonuses, rose by 3.8 per cent in the year to December 2007. It seems likely bonuses are set to fall in the year ahead too, so 2008 is likely to see real inflation, that’s inflation measured by the retail price index which includes council tax and mortgage payments, outstrip wages.
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