Society Generale’s resident perma-bear Albert Edwards just emailed out his latest dispatch on the British economy. It’s safe to say that in Albert’s view, things are
not going very well.
“After five years of the Conservative and Liberal Democrat coalition government, the UK economy looks like a ‘ticking time bomb’ waiting to explode after the election,” according to Edwards.
That’s based on the UK’s two big deficits — the government budget deficit that everyone knows about, and the less well-known current account deficit.
A negative current account just means there’s more money and goods leaving the UK than there is coming in. The country imports more than it exports, and international investors get more money out of the UK than British investors get our of their foreign investments.
And when you add those two deficits together, it makes for an ugly picture:
We are wholly apolitical on these pages and heaped similarly scathing criticism on the UK macro situation under a Labour administration back in January 2008, even comparing the UK situation unfavourably with the US Ponzi scheme, which we then thought was set for imminent collapse.
At least back then the UK was not alone in reaping the sour fruits of economic mismanagement – the US and the eurozone periphery were all sailing in similarly unstable, leaky boats. But now the UK economy stands alone, up to its eyeballs in macro manure. Eventually the stench will fill the nostrils of currency markets with the inevitable result — another sterling crisis.
So it’s not like 2008, when everyone was hit by the financial crisis. The UK is now in a uniquely poor position, according to him.
Current account deficits would typically be balanced out by a country’s currency weakening — because the country (in this case the UK) is trying to get hold of a lot of other international currencies and there’s more sterling on offer than anyone really wants to hold. A weaker pound might help British exporters to cut that trade deficit.
Edwards also suggests the UK’s efforts to cut the deficit in its public finances has been a lot less impressive than the government suggests:
Here he is again:
The coalition government saw the recessionary impact of its early attempts to cut the double-digit public sector deficit combine with the eurozone crisis and reversed course. Politically though it has been necessary for the coalition to maintained the fiction of fiscal consolidation rather than admit that a U-turn had taken place. They talked the talk, but they certainly did not walk the walk…
The OECD calculates that the underlying UK deficit, once adjusting for the cycle and removing funnies, has barely improved, declining from a peak of 8½% of GDP in 2009 to 6% a 2½ point decline. The US deficit by contrast has seen a reduction of 6% of GDP and Spain 7%.
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