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Economy in Brief

UK Retail Survey Disappoints
by Robert Brusca  February 26, 2013

Moody's has downgraded the UK economy and maybe it is because despite the governments adherence to austerity recovery still won't start. Markets do not seem to care much about what Moody's thinks. After the credit-rating agencies' performance in the financial crisis a bad rating from a ratings agency may be a badge of honor.

At least there is no adverse market effect from the downgrade to hurt the UK economy further, because it looks like it is still hurting enough from tis ongoing austerity program. In the second half of 2012 there was optimism that the UK might be emerging from recession but with the relapse into negative territory for GDP and the ongoing weak economic data it does not look at all like it is on the doorstep of recovery. While there have been some signs of life in the UK housing sector as home prices have stabilized; there is still weakness in the demand for home financing. In addition there is weakness in the retail sector.

The CBI retail survey shows a plunge in the February readings and a sharp deterioration in the expected readings whether compared to year ago levels or to 'sales for this time of year.'

The readings for 'sales for this time of year' (FTTOY) are the relative strongest for both actual sales and for expected sales. Still actual sales 'FTTOY, are still weaker than their February value only 21% of the time while expected sales FTTOY are weaker than their expected values 44% of the time. Neither one of those readings would qualify as 'good' or even as 'adequate'.

Sales compared to one year ago are weaker than their current momentum 36% of the time; orders compared to one year ago are weaker about 9% of the time- that is they are not often any weaker than this. Expected orders compared to a year ago are weaker than this only 7% of the time. These are not encouraging figures and they do not reinforce the notion of the negative Q$ GDP report as a fluke.

In this environment the government is vowing to stick to its policies while the opposition is looking at the lingering fiscal deficits and calling for all sorts for tax increases, taxes on mansions and on wealth.

The UK and the US are falling into the same trap of trying to balance their budget on tax receipts at a depressed point in the business cycle. Keynesian economics -true Keynesian economics- tells us that this is the time to run or to tolerate deficits not to close them. Incurring fiscal drag as the economy descends into a period of weak or negative growth is not really in keeping with what we know about economics any more than stepping on the brake as your car tries to climb a hill will get the job done.

The problem is that too many countries have undertaken to believe that what Keynes said could be used a cyclical relief policy has in fact been used as part of structural growth policy so that now when a nation finds itself in recession the economy already has run its deficits and it is hard to press even larger deficits into service because of the negative impact on credibility and on expectations.

It seems to me that if Keynes were alive today he would not be a Keynesian, at least not in the way it is now meant. Even so, the main observation here is that austerity continues to be a culprit. And that the potential for budget stimulus not only is not being chosen but may now, not even work.

If austerity continues to not work (as Moody's seems to think) and if it undoes Mr. Cameron's coalition government would it really be replaced by a hard core falling for more taxes on the rich?

While there is no evidence that the UK government is losing its footing now, markets are certainly always aware that when economic times are not good politicians are vulnerable especially in a parliamentary system. So do all of these calls for more taxation on the rich really act to undermine British confidence or are they simply politics to be ignored as politics-as-usual?

As for the rating downgrade Moody's writes this:

"The main driver underpinning Moody's decision to downgrade the UK's government bond rating to Aa1 is the increasing clarity that, despite considerable structural economic strengths, the UK's economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and the drag on the UK economy from the ongoing domestic public- and private-sector deleveraging process"

As such it would appear that just about any country could be downgraded in this environment. The question is this: if you live on an aA1 planet, can anyone really be AAA?

At least the rating downgrade appears to not have affected the UK or its borrowing costs very much. And the Moody's downgrades on the prospects for growth are themselves wholly speculative. As long as the global environment is so weak, those concerns attach to every nation in the world.

Still, what we observe from the UK economy is a continuing inability to mount growth. There is no telling when the economy will gain traction or if the current course of action will need to be addressed to pull the economy into a true growth orbit. However, it is an odd suggestion that higher taxes on the wealthy and increased tariffs on large homes would provide any relief to the UK's current circumstance. It seems quite clear that the problem is more that the budget deficits in the UK are large because tax revenues are weak due to faltering growth than that deficits themselves are making the economy weak. The notion that raising taxes to cut the deficit will somehow heal the economy is a peculiar argument from the annuals of voodoo economics.

It is a sign of the times that in France, in the UK and in the US there is some sort of war being waged against the affluent as though they are- or were- the problem. In reality that group is the only group still is really spending at all. Undermining them hardly seems to be the key to unlock anything but more trouble.

UK Retail Volume Data CBI Survey
Reported: Mar
2013
Feb
2013
Jan
2013
Dec
2012
12M
Avg
%tile Max Min Range Queue
%
Sales
Yr Ago
-- 8 17 19 15 56% 57 -55 112 36.2%
Orders
Yr Ago
-- -19 15 13 4 35% 52 -58 110 8.9%
Sales:
Time/Yr
-- -20 1 -18 -15 33% 41 -50 91 21.6%
Stocks:
Sales
-- 9 5 9 14 29% 31 0 31 9.2%
Expected: Mar
2013
Feb
2013
Jan
2013
Dec
2012
12M
Avg
Mar
2013
Max Min Range Queue
%
Sales
Yr Ago
9 13 10 25 15 56% 56 -52 108 29.7%
Orders
Yr Ago
-19 1 0 11 1 36% 41 -53 94 7.4%
Sales:
Time/Yr
-5 -7 -6 -1 -9 56% 31 -51 82 44.2%
Stocks:
Sales
6 2 10 13 8 23% 26 0 26 5.7%
Since Sept 1969
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