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:
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