In a recent post I was worried by the potential weakness of UK domestic demand after the fall of the real disposable income for three quarters in a row and by the downturn of the saving rate (see here). I also said in this post that consumer credit was growing too quickly. This post is a complement.
We can go further by looking at all the households’ financial liabilities.
The graph below shows the ratio of the households’ total liabilities to the disposable income. This ratio is now higher than the level that triggered the 2008 financial crisis.
When we go into details we see two divergent trajectories for the debt and the disposable income. These profiles are a source of constraints for households. Debt is growing too fast and a rebound in disposable income is necessary to avoid a further weakness first on consumption and after on real estate.
The comparison of industrial activity in the European economy is very instructive when we consider the period after the British referendum on Brexit.
Despite the acceleration of world trade, British industrial production is lagging behind the various countries of the Eurozone. This is shown in the graph below.
The profile of industrial activity in Italy flies across all the major European countries, while the United Kingdom is clearly lagging behind, especially since the beginning of 2017. The gap is significant with the index of the euro zone as well as with France, Germany and Spain. Continue reading
Negotiations on Brexit may lead to a negative and persistent shock in the United Kingdom as it will deeply change rules for the external trade. Therefore there is a need to carefully look at the domestic demand momentum in order to eventually counterbalance this negative and persistent shock.
At the same time, the Bank of England has mentioned (Carney in Sintra or Saunders here) that the monetary policy could be normalized. In other words, the BoE is wondering if there is still a need for stimulus. Here too it is interesting to carefully look at the domestic demand to see if the need for stimulus is superfluous or not. Continue reading
In the wake of the UK elections, the ensuing confusion suggests an increasing likelihood of a soft Brexit, as Theresa May does not have a majority and will have to deal with the situation as it stands. However, it cannot, and will not, be quite that simple as this would mean going back on the result of the Brexit referendum.
One source of confusion derives from the fact that British citizens’ image of Europe has changed considerably in the space of a year, and according to a survey by PEW Research Center in Spring 2017, a majority of the population in the UK has a positive view of Europe i.e. 54%, or 10 points higher than this time last year at the time of the referendum.
The idea of a soft Brexit has emerged as a result of Theresa May’s losses at the recent general election. Continue reading
Interesting time in the UK as the Bank of England is facing an important arbitrage. There are potentially two types of shocks in the UK.
One is associated with the consequence of the Brexit on the growth momentum. And the other reflects higher inflation rate (above the 2% target).
The BoE meeting this morning has shown that MPC members may have very different views on monetary policy drivers. At this meeting the vote was 5 for rate stability and 3 for higher rates.
Just a reminder: the BoE has reduced its main rate to 0.25% last July just after the referendum on Brexit in order to accommodate the possible negative risk associated with the referendum result.
Two graphs on recent data can illustrate the MPC dilemma. Continue reading
Uncertainty and the risk of instability have dramatically gone up after the general elections. Theresa May’s bet has failed. She expected a triumph but she no longer have an overall majority. What are the consequences?
1 – Theresa May will stay at the 10 Downing Street for the moment and she will form a new government. The coalition with the Irish party DUP will give her the majority. DUP was a hard Brexit supporter.
The main question here is to know for how long she will have a majority. The Conservatives have 318 seats and DUP 10. The total is 328 and the overall majority is at 326. As there are 4 partial elections each year on average, then Theresa May may have a majority for two or three years if the Labour party remains strong and wins some of these partial elections. How will she manage this issue? Continue reading