Abet Chichi2

[Chris McConnel]

from Barry Ritholtz


Is NICE (Non-Inflationary Consistently Expansionary) Over?

Back in June, we noted that the U.K.was foreshadowing the U.S. economy.

That remains true today: The British economy seems to be about a year or so ahead of us in their economic cycle. Their Real Estate market took off 12 months before ours, and it started cooling long before the U.S. market did. The Bank of England started their rate raising cycle in November 2003 -- 7 months before Greenspan & Co. began tightening. And just like in America, British consumers have been going deeper and deeper into debt.

Some in the U.K. are worrying that he NICE decade -- Non-Inflationary Consistently Expansionary -- is coming to an end:


click for larger graphic


What does this mean for the Global Economy? Britain's economy isn't as large as the U.S., so a slow down there wouldn't slow the rest of the world. But its a harbinger of things to come: Britain's economy is the canary in the coal mine for the rest of Europe. Any economic woes there would be an early warning sign of bad things to come for the rest of Europe.

The WSJ observes:

       Britain's economic success during the past 10  
        years has been a significant driver for some  
        beleaguered European economies to consider  
        changing their tax and labor laws to become  
        more competitive. Looking at rising  
        unemployment rates and anemic economic growth,  
        reform-minded politicians in France and  
        Germany, for example, have pointed to Britain  
        as a possible model for how a larger European  
        economy can compete in a globalizing world.

Further complicating matters -- the Bank of England is deciding whether to cut (that's right, cut) interest rates at their next meeting. The Financial Times reports:

       Markets are becoming increasingly worried about  
        the outlook for inflation globally while  
        policymakers’ concerns over risks to price  
        stability have been clearly reflected in a  
        stream of aggressively hawkish comments by  
        central bank officials. 

       The dilemma facing the Bank of England in  
        deciding whether to cut interest rates in  
        November will be illustrated clearly next week  
        by some UK economic releases. Inflationary  
        pressures are mounting while growth momentum is  
        fading with little suggestion of a pick-up in  
        consumer spending or manufacturing output in  
        the short-term.

       Recent statements by members of the MPC  
        indicate deep divisions. Mervyn King, governor  
        of the Bank, has said policymakers were  
        surprised by the consumer spending slowdown and  
        the pick-up in the inflation rate.

       More urgent calls for lower interest rates can  
        be expected if the initial estimate for UK  
        third quarter gross domestic product proves  
        disappointing on Friday. A weak performance  
        from the industrial sector and the yawning  
        trade gap means that growth is expected to slow  
        to just 0.3 per cent – a fifth consecutive  
        quarter of sub-trend growth.

       Slower growth presents a significant challenge  
        to the government’s finances. Public sector net  
        borrowing is growing faster than last year and  
        September’s figures on Thursday could bring  
        cumulative PSNB to £25.6bn at the half way  
        point of the fiscal year compared with the  
        full-year forecast by Gordon Brown, finance  
        minister, of £32bn.

       In the eurozone, the initial estimate for  
        consumer price inflation in September at 2.5  
        per cent could be revised higher tomorrow  
        following the warning from the European Central  
        Bank of the need for “strong vigilance” in  
        controlling inflation expectations.

What does this mean? The decelleration of growth is hitting the U.K., Europe and the U.S. first. So far, it appears that parts of South America and Asia are best positioned to weather this slowdown.

Of course, in the event of a true global recession, even Asia will eventually succumb. My best guess is that they are a year or so behind our cycle . . .


Source:
U.K. Tightening Cycle Offers Lesson in Difficulties of Raising Rates, Maintaining Growth
MARC CHAMPION
THE WALL STREET JOURNAL, October 17, 2005; Page A2
http://online.wsj.com/article/SB112950315252770190.html

Bank of England faces dilema over inflation and growth
Chris Flood
Financial Times, October 16 2005 15:50
http://news.ft.com/cms/s/09d83146-3e3c-11da-a2cb-00000e2511c8.html

(Link)