Turning Japanese? I really think so
Fraser Nelson 3:03pm
After the rate cut, one question presents itself: is the British economy turning Japanese? Now rates are at 2%, it makes you wonder how low they can go and whether we are approaching a zero-rate like Japan after its economy blew up in 1990, leading to the “lost decade”? To answer it, let’s get a doctor to take a picture so we can look at the UK economy from the inside as well (*)
The market expects rates to bottom at 0.75% next spring and then rise slowly. So those lucky few on a variable mortgage will be in the money for the foreseeable future – like Japan, where rates never quite picked up. The Brown bust had the same characteristics of Japan’s: a debt-fuelled asset boom followed by painful recession and demand slumping so low that we get deflation. In a way, Britain is worse placed than Japan because its households were able to spend whereas ours have debt at 178% of income – the highest any G7 country has ever known. Like Japan, the recession has shown government spending to be way out of kilter with the size of the post-bubble economy, and our budget deficits are set to easily reach those of Japan at its peak.
But a recent note from Citibank spelled out the differences. The Yen appreciated, setting a curse on the economy whereas sterling is going to hell in a handcart. This will help exports of goods and services, but after a far longer lag than many think right now. So with falling prices and near-zero rates, we’ll turn Japanese in the short term. But thanks to our wise decision to stay out of the Euro, the collapse in sterling may (eventually) give the British economy the lifeline that was denied to Japan for so long.
FISCAL DEFICIT AS SHARE OF GDP
(*) No one around the office got this reference, but the few of you who do may perhaps appreciate this reminder:
Previous
Comments
Stu
December 4th, 2008 3:21pmErrm... Turning Japanese was a euphamism for something else, you know. Something that might make you go blind...
Just letting you know. Perhaps it's not such a bad analogy for the people running our country, though...
Graeme Stewart
December 4th, 2008 3:23pmGot the reference and pumpimg the money saved from the tracker mortgage back into the mortgage. Could have the house paid off in 2 years.
Beginning to feel a wee bit smug for having saved, put money in the bank and driving a 10 year old car.
Saw someone on the BBC new last night who had lost his job (no redundancy insurance), missed two payments but the new BMW is still sitting at the door. Now I am expected to guarantee his mortgage as well.
Unsteady Eddie
December 4th, 2008 3:33pmHow low can we go?
Well, in the full suppleness of my youth, I could manage a Corgi.
Andrew Forbes
December 4th, 2008 3:42pmShowing your age with that song reference, Fraser; that makes you early 40s, at least.
Toyah
December 4th, 2008 3:54pmDear Fraser
I don't really understand any of the economics stuff, but I like the video. Happy days!
This month's challenge: to include as many 1980s pop references in articles about the credit crunch as you can. Tenuous analogies totally welcome. Thanks and good luck!
Short the UK
December 4th, 2008 3:55pmFraser,
That was a pretty bullish post.
I put forward for book of the year Financial Armageddon by Michael Panzer.
I personally think the depression is just starting. The commanding heights of the economy are being nationalised. Mass unemployment beckons. Riots will ensue. Quantitative easing will begin in 2009.
The BoE interest rate tells you that this is Armageddon.
The media continue to pray for a U, today you sound like you are voting for a U.
I sadly see an L, with a B coming soon.
Our economy will collapse and investors will run from UK plc.
It is very dire.
It is a national emergency.
Right now we are in eye of the hurricane. It is an eerie space.
Armageddon is coming to UK plc.
Tally ho!!
Tiberius
December 4th, 2008 4:02pmFraser, where do you get the 0.75% floor rate from? And if right, doesn't it suggest sterling will start to strengthen from Q3 '09 as rates rise?
Graeme Archer
December 4th, 2008 4:02pmFraser, I think referring to that song can get you banned from the BBC :-)
TrevorsDen
December 4th, 2008 4:05pmMissing the point of the day --
SNOW !
Wake up again.
At the very time our economy is facing further ruin thanks to our government addiction to the new age religiion of global warming - we are having one of the worst Decembers in years.
Thats because in fact temperatures have been FALLING over the last 10 years.
BIG issues Mr Spectator people!
William Norton
December 4th, 2008 4:26pmFraser, your article gave me the Vapors.....
Tiberius
December 4th, 2008 4:29pmShort: it would be good to know a bit more about you as in: are you for real or just an economic manifestation of the TGF political?
oldtimer
December 4th, 2008 4:53pmIt doesn`t seem to me that the UK is like Japan. You need to look a little deeper. Just to trade a few numbers with you (year `07, source CIA World Factbook):
Current balance: Japan $210bn, UK -$119bn
Exports: Japan $678bn, UK $442bn
Imports: Japan $573bn, UK $621bn
FX reserves: Japan $954bn, UK 57bn
External debt: Japan $1.492trn, UK $10.45trn
Public debt as % GDP: Japan 170%, UK 43.7% at end 2007.
And Mr Brown says we are "well placed".
Where are all our exports (a) going to come from - which indutries and (b) even more importantly at a time of global recession, where are they going to go - which markets? Chances of future growth are higher in Asia and emerging markets than in the mature, over borrowed, markets of the USA and Europe. Japanese business is far better placed to sell to these than UK business and the Japanese economy is better placed to face the recession/depression despite its high public debt ratio.
Fraser Nelson
December 4th, 2008 4:58pmTiberius, the Bloomberg machine calculates market rate expectations. I can do a graph if you really want. The rate recovery is so slow that i don't think it will make much of a difference to sterling. The broader issue is whether UK PLC can pay back all the money it owes the world. The credit default "insurance" rates are soaring: right now it is literally judged safer to lend money to a Spanish bank than the UK government. Questions over Britain's creditworthiness will have more influence over sterling than interest rates, i suspect.
Andrew Forbes, I'm 35. But consider the early 80s the best era for music.
Ian C
December 4th, 2008 5:17pmWhen the history books are written it will be the Chinese who get the blame - with some merit, but the characters in the western economies that should have understood the impact of the Chinese entry to the modern world were too busy earning ‘loadsamoney’.
Communist China had to keep its people sweet so needed a cheap currency so that manufacturing jobs could grow rapidly otherwise communism was dead. In reality it was a jobs maintenance scheme for the Chinese Communist party that we contrived in by allowing them a favourable exchange rate for all this time.
So the $ and other advanced economy interest rates were kept far too low - and very easy for traders and bankers to make money from borrowing it. At home we could borrow more because China’s export prices squeezed our inflation into an ‘its different this time’ boom. It also made it easier for social democrats to borrow and spend - the rest is history.
Japanese? It hit them first as they benefited from the early rise of China and over cooked their economy in the 80's. We've got it far worse than them - but 20 years later. At least they have the cash in the bank from 20 years of capital accumulation. To be like them we will have to be the same. I can’t see how we can avoid it.
Tiberius
December 4th, 2008 5:44pmI'm clutching at straws, somewhat, Fraser, over the exchange rate.
We buy in the dollar and euro zones, and a year ago our advice from our forex providers was Q4 '08 could see the euro rate recover. Er, didn't really happen, did it. Now the dollar has joined in the fun.
I am inclined to agree with you, that any improvement for importers is unlikely, and could get worse even if base rates avoid going to zero or indeed recover somewhat. Buying long-dated forward contracts is a must to minimize the effects of Brown's shipwrecked SS Gt. Britain.
Some predictions I've heard say the euro could go to 82p. One reason I'd be interested in gauging Short's reliability.
Oh, and graph not needed - not for me personally anyway.
Short the UK
December 4th, 2008 7:50pmTiberius,
I am a humble trader who specialised in UK Small Caps. This has become a dead trade. I have studied the Credit Crunch for the past year. There is so much noise in the market that I have decided to hug the people who have been calling this depression correctly. I analyse their assumptions, cross reference, and monitor the noise.
I have been consistenly amazed by how out of touch the elite have been toward the Credit Bubble and how they make policy on the hoof.
My fav. quote of the past 48 hours is that 'the UK has a 1 in 5 chance of seeing GBP fall 50% in value,' uttered by Martin Wolf. He is starting to see Armageddon.
Like a business it will be the fundamental aspects of the UK economy that will determine the value of GBP. UK plc was a three trick pony that has run out of earning power, it has gone ex-growth.
If you want to bear with me then I hang out on a thread at ADVFN.
http://www.advfn.com/cmn/fbb/thread.php3?id=18257319&from=793
The thread's ticker is TR32.
I try with others to work out the way forward for capital appreciation.
Please pop by....
Ian C
December 5th, 2008 10:05amShort
Your thread does not work.
I agree with you except for the UK quoted overseas earners are good at a time of weak sterling.
Short the UK
December 5th, 2008 12:49pmIan C,
You have to open a free account at ADVFN.com
Then use the code TR32 in the EPIC box.
If we are going into a depression are equities worth holding, is the risk adjusted return worth it? The long end looks more profitable and less stressful.