I am very closely watching what is happening across the pond, as the "mini me" to the U.S. has chosen a path of quite serious short term pain, with the hopes of a far better longer term outlook. While the U.S. quibbles over a relatively tiny $38B in spending cuts (relative to a $14T economy), the British government went in with a chain saw, cutting many government departments by about a fifth. (See United Kingdom Unveils Serious Austerity Measures - Potential Slashing of Half a Million Government Jobs.)
This, along with a VAT tax increase at the turn of the year, is obviously going to pressure the economic fortunes of the country in the near term (as quite a few developed economies are now dependent on the steroid drip of massive government spending), and potentially push it back into recession. Obviously the U.S. has taken the opposite tack, with the "kick the can" approach: Continued federal deficits in the 10% of GDP range are helping to produce a government funded 2.5-3.5% type of GDP -- but obviously creating a massive amount of liabilities for another generation to deal with.
Hence the divergence of the two countries is very fascinating from an economic viewpoint, as both attempt to cope with the same globalization issues and damage to the middle and lower classes. It will probably take many years before we can ascertain which path worked out best.
March sales in the U.K., released this morning, were awful. On the plus side (relatively speaking) inflation showed a surprise drop as food prices of all things retracted; it seems purchasing power has been so sharply affected, producers simply cannot pass along the higher prices to the end consumer. Frankly it is amazing that food sales have so much elasticity; you'd not expect sales volume in an essential such as food to drop like this.
Via U.K. Telegraph:
- Sales fell by 1.9%, the largest monthly decline in the 16 years in which the British Retail Consortium (BRC) and KPMG have collated sales. Like-for-like sales, which strip out the impact of stores that have been open for less than a year, fell by 3.5% in March.
- Sales in every category bar footwear fell, including food, clothing and furniture.
- Stephen Robertson, the director general of the BRC, said: "This is the worst drop in total sales since we first collected these figures in 1995. Non-food retailers were particularly hard-hit. This is strong evidence of the pressure customers and traders are under. This year's later Easter is a factor but this fall goes way beyond anything that can be explained by that alone."
- Robertson said that "uncomfortably high" inflation and low wage growth have produced the first year-on-year fall in disposable incomes for 30 years. "Mounting fuel and utility costs, falling house prices, higher VAT and the prospect of more tax rises and job losses left people unwilling to spend unless they really had to," Robertson added.
- Food sales were "well below" their levels last year, the BRC said.
- Data released by the Office for National Statistics revealed that inflation as measured by the Consumer Prices Index dropped from 4.4% in February to 4% last month – the first decline since July last year. Sharp drops in the cost of food and drink were the main factors behind the fall, which wrong-footed City analysts who had been predicting that inflation in March would edge closer to 5%.
- Financial markets have been fretting in recent weeks that U.K. inflation has been running at more than double the government's 2% target for the CPI, but today's easing of upward price pressures will stifle calls for borrowing costs to rise next month.