There are several threads I want to comment on in the wake of the UK general election. And from an economic standpoint, the conclusion that follows is that austerity in the UK has now lost its appeal politically. It also means lower yields for longer. Let me explain how I came to this conclusion.
First, at the start of the year, I warned that the economic risk from Brexit was now higher than it was in 2016, rather than lower as Bank of England’s head Mark Carney was saying. We were set for Article 50 to be triggered and a hard Brexit. I said that’s when “consumers actually do stop buying and business investment sinks” – something that would demand policy offsets from the Bank of England and from the Treasury.
A stumbling economy also means lower yields. And we see that now, with the 10-year gilt yield hovering around 1%, despite much higher inflation and a resumption of falling real wages.
Source: Bloomberg
These negative real yields are what we used to refer to as financial repression. And I believe financial repression will remain in place in the UK, as it will in Europe and Japan – despite signs of incipient tightening.
Now, with regard to the UK economy specifically, it has indeed begun to underperform. I mentioned the resumption of negative real wages. This has been particularly nasty for the UK, second worst in the EU to Greece.
CHART OF THE DAY: UK real wages – down to January 2006 levels
Very relevant to general election results pic.twitter.com/s02chBAnb5
— Edward Harrison (@edwardnh) June 9, 2017
Source: The Independent
This is beginning to have a negative effect on consumption. Data from credit card company Visa shows this squeeze on households is leading to lower spend. Real spending by British consumers using Visa debit and credit cards was 0.8% lower in May than it was in the same month in 2016. And this suggests that the poor Q1 data from the UK, in which Britain grew at the slowest rate in the G7, are not an aberration.
