Interpreting the U.K. Slowdown and Japanese Debt

Interpreting the U.K. Slowdown and Japanese Debt

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England’s economy turns down; Japan’s credit ratings slip. It’s hard keeping track of the portents. If only we were living in ancient Rome, we could haul out some pigeon entrails to make sense of it all. As it is, we’re living in the Age of Obama and the Time of the Tea Party, people interpret the signs to further their agenda. For those on the left, the situation in the U.K. just goes to show that governments need to keep spending to prevent another downturn – beware the notorious double-dip. For those on the right, Japan’s worsening debt problems reinforce fears of our own budget deficits. We could be next!

Truth is, these recent developments are merely signposts along an uncertain path. Several factors caused the sudden dip in the U.K.’s economy, to a pullback of 0.5 percent in the fourth quarter instead of the expected half-point gain. Among other things, the coldest December in 100 years caused a fall-off in construction and retail spending. Liberal economists would also blame austerity measures adopted in October by David Cameron’s coalition government -- but in reality they had barely taken hold. At worst, concerns about the impact of the cuts might have dampened consumer sentiment. That does not appear to have been the case.

While still low, U.K. consumer confidence rose in December after three months of decline. Sentiment tumbled in November presumably in reaction to announced budget measures, including layoffs of public workers and a sizeable rise in the VAT. Confidence in the “present situation” bounced slightly higher in December, but the move up in expectations was more pronounced. In addition, while those surveyed appeared slightly more positive about current job availability, their optimism about jobs six months further on was markedly higher. These surveys don’t suggest a populace depressed about the effects of government reforms. Likewise, a slight (0.4 percent) improvement in home prices in December – a turnaround from a decline in November – suggests a steadying of England’s economy and confidence.

The British Chamber of Commerce (BCC) said manufacturing grew “very strongly” in the fourth quarter. Demand for goods in Asia and other emerging nations is driving exports and boosting overall production, much as in the U.S. and Germany. In the U.K., exports last year reached their strongest level since the fourth quarter of 1994, according to the BCC. Like its U.S. counterpart, the BCC is calling for government to implement “a better support network for businesses” in order to increase employment.

More recently, the VAT increase on Jan. 4 has put a damper on spending. The Confederation of British Industry’s economist pointed to slow wage growth and rising prices, which typically include the VAT, as crimping retail sales growth. So, the argument continues. Will the U.K. slowdown persist, and will it be attributable to cuts in spending or to increased taxes? More important, should the U.K. have persisted, as the U.S. is doing, in continuing to increase its debt?

For those unwilling to face reality, Standard & Poor’s downgrade of Japan’s credit rating is a healthy reminder that excessive debt comes at a price. Ultimately, Japan’s ever-rising debt, incurred in the Keynesian expectation that deficits would boost growth, earned that nation nothing but a financial sinkhole. Without reforms to social security programs, lower taxes and boost growth, Japan’s outlook is dark. You don’t need an eclipse of the sun to spell out the future: rising interest rates and even lower growth.

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After more than two decades on Wall Street as a top-ranked research analyst, Liz Peek became a columnist and political analyst. Aside from The Fiscal Times, she writes for FoxNews.com, The New York Sun and Women on the Web.