Monday, March 07, 2005
Crash, or not?
Posted by David Smith at 09:54 AM
Category: Thoughts and responses

For those who did not see it, here's a link to last Friday's Money Programme, which examined the case for a housing crash this year. I argued the soft landing case, though the programme was tilted firmly towards a crash.

Comments

“A house price crash in the absence of an economic recession? It just doesn't happen in the UK."

Then this will have to be the UK’s ‘recession we had to have’. But, as we’ve already seen, a recession defined as two consecutive quarters of negative economic growth is no big deal.

It’s not so much economic growth that matters as unemployment. The size of the UK workforce fell from 29million at the start of 1990 to 27million at the start of 1993. That explains the drop in house prices in the early ‘90s.

So will we lose jobs now? It depends if they’re productive jobs. It seems many of the public sector jobs that have been created recently have done nothing to put people back in work or to make them more skilled or more efficient.

Equally, many private service sector jobs seem to be not much more than everyone taking in each other’s washing – or polishing their nails in modern terms.

It just depends on spending. If rising interest rates make consumers cut back on buying imports but continue to buy local services, all will be fine. If not, it’s going to be nasty.

Posted by: David Sandiford at March 8, 2005 07:29 AM

"The UK's deficit on trade in goods and services worsened in January to stand at £3.7 billion - compared with the revised deficit for December of £3.5 billion.

The deficit on trade in goods in January was £5.2 billion – £0.3 billion more than the deficit for December.
:
Within manufactured goods the main falls were in the volume of imports of chemicals, and consumer goods other than cars. This was partly offset by rises in imports of cars."

There's no sign there that consumers are resigned to giving up their new BMWs.

Posted by: David Sandiford at March 9, 2005 11:02 AM

At an individual level, driving a Beamer is normally a sign of success – so why should the number of BMW imports matter at an aggregate level? Surely the deficit represents as much a signal of “loads of money” confidence than as a sign of decline.

Looking at the figures there are 2 notable features:- firstly that the deterioration was entirely accounted for by balance with the Non EU world – with Europe with whom the exchange rate has remained relatively constant.

Secondly, while imports have risen, so have exports (unlike the US) which suggests that the economy remains competitive.

So on an external basis, I can’t see any case for raising interest rates to restore external balance to the real economy. And given that the net external debt position is (probably) a long way from being problematic, there’s not really a case to restore external balance from the financial perspective.

Posted by: giles at March 10, 2005 04:20 PM

”Surely the deficit represents as much a signal of “loads of money” confidence than as a sign of decline.”

The question is whether that confidence comes from an increasingly skilled and adaptable workforce able to earn real wealth in the world or from a false sense of security based on the ability to borrow loads of money at temporarily low rates.

Even if we assume that interest rates and house prices stay the same for the rest of the year then Mortgage Equity Withdrawal will still fall significantly (otherwise people will really be eating into their wealth).

If the reduction in spending of MEW money occurs mostly on imports that’s fine or if companies replace local spending with exports that’s fine. But otherwise, reduced UK spending will lead to the loss of jobs. And that’s the slippery slope.

So it would be best if the MPC can convince consumers not to buy imports - and especially not to borrow to buy imports, as a lot of imports are big-ticket items. At the same time the MPC has to keep all that spending on UK services alive.

It’s a very difficult balance but I think unchanged consumer habits will eventually force the MPC to raise rates and therefore the sooner the better.

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