As the economic news from the eurozone improves by a notch (although not in Greece, inevitably), US consumers are sending the opposite signal.
Sluggish retail sales in the first quarter of the year were, we were told, caused by a cold snap. There would be a spring bounce, investors assumed, as supposedly confident Americans spent their windfalls from the lower oil price. Well, it didn’t happen in April: yesterday’s figures were flat, and the weather-related explanation is wearing thin. This could be the start of a worrying trend.
Indeed, if Americans are preferring to use excess cash to pay down debt, it’s hard to see why they would change their minds now. The oil price has started to rise again and long-term bond yields are also on the up, reducing opportunities to remortgage at a cheaper rate.
Economists assume that this “soft patch” for the US economy is now so soggy that the US Federal Reserve will, again, postpone its attempt to raise interest rates. A hike next month is seen as a non-starter; it will come in September, at the earliest.
But what if the run of weak numbers points to something more severe? On cue, HSBC economist Stephen King yesterday published a weighty analysis titled “the world economy’s titanic problem” that pointed out that it has been six years since the trough of the last US recession.
“If history is any guide, we are probably now closer to the next one,” he said. Business cycles always turn, and after six years of growth, even at a pedestrian rate, the current recovery is old. One could make the same point about the UK, where the economic weather tends to follow that of the US, with a lag.
King’s point – which explains the Titanic reference – is that policymakers are out of lifeboats if a recession were to arrive. The US Fed has dealt with past recessions by cutting interest rates by at least five percentage points. That is obviously impossible today because rates are still on the floor.
To change the metaphor, the arsenal is bare: “Whereas previous recoveries have enabled monetary and fiscal policymakers to replenish their ammunition, this recovery – both in the US and elsewhere – has been distinguished by a persistent ammunitions shortage,” says King. “This is a major problem.”
He then considers possible alternative ammunition – everything from more quantitative easing to fiscal stimulus (tricky, given still-high debt levels) to “helicopter” money – before concluding that only one option is likely to lead to economic success. Unfortunately, this is the politically “implausible” idea of increasing the retirement age.
It’s a depressing read, not least because there are plenty of potential recession triggers beyond a fragile US recovery – a downturn made in China, for example.
But King’s basic point seems unarguable: “We may not know what will cause the next downswing but, at this stage, we can categorically state that, in the event we hit an iceberg, there aren’t enough lifeboats to go around.”
Building for the future
“Our forward order book, at more than £2.5bn, is the highest level achieved by the group,” says Mark Clare, chief executive of Barratt Developments, the country’s largest housebuilder, yesterday. “We remain committed to helping increase the number of new homes across the UK, with our completions increasing by more than 40% over the past four years.”
Cheery news, especially if you are a Barratt shareholder. Do not, however, conclude that this momentum means market forces alone will eventually solve the UK’s housing shortage, or even deliver a minimum of 200,000 new homes a year by 2020, the goal that dominates politicians’ debates.
First, even after that 40% increase in four years, Barratt will complete 16,100 homes this year, which compares with about 20,000 in 2007, the last year in which the UK built 200,000 houses. Second, the company reckons its current capacity is about 18,000.
Third, even when capacity is reached, Barratt’s shareholders are unlikely to sanction a building bonanza. Their memories are long. Barratt, and others, almost bust themselves in the pre-2007 boom by chasing volume and financing expansion with too much debt. There is no appetite to repeat the experiment; steady dividends will do nicely.
None of the above is intended to imply that Barratt is failing to pull its weight. It is doing roughly what you’d expect. There is a limit to how much housebuilding the stock market is willing to finance and the big five quoted housebuilders, as a group, can provide about 30% of the supply. Don’t expect much more.
So, before one even talks about planning rules or the green belt, there’s a financing point: if central government wants to address the housing shortage, it will have to find a way to shovel more cash to local authorities.
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