The UK government used to tell us the UK was the best placed of the major economies to weather the "global storms". The government suggested the UK would be first out thanks to the massive public sector "stimulus" administered. They ignored the weakness of the large UK banking sector which was always going to take time to restore lending. They overlooked the highly borrowed state of UK consumers.
The second quarter figures tell a different tale. The UK economy continued to fall, falling faster than the USA, falling faster than the stronger major economies which saw some recovery. France, Germany and Japan showed signs of rising output. It is true UK government consumption rose, thanks to the extra spending and the massive borrowing, which helped the figures for output. Overseas trade improved but little despite the devaluation of last year. The big reason the UK continued to fall was the continued squeeze on the consumer.
The authorities brought the UK consumer boom to an abrupt end by their hikes in interest rates and their scarce money policies of 2008-9. They did so presumably because they thought consumers were borrowing too much and the party had to end. They got into a panic late in the day, cutting interest rates sharply and printing money to try to offset what they had done over the two preceding years. Meanwhile consumers are taking the hint they gave them earlier, and are busily repaying debt. That means they spend less. All the time people are highly borrowed - as they are - and all the time many fear unemployment - as they do - they will repay more debt than the government now wants and spend less than the government wishes.
One of the reasons people are likely to stay cautious and repay more debt is the likely pattern of interest rates. Few consumers believe 0.5% rates. Firstly, most consumers cannot borrow at those rates. If you can get a loan it will be many times base rate. Secondly, most people expect rates to have to go up again. They have been burned by the past interest rate hikes. They realise that given the huge sums the government needs to borrow, higher rates are likely in the medium term.
The government hopes to keep rates down through quantitative easing to see them through to near the election. Once that is out of the way markets are likely to force rates up on government debt, unless sufficient action is taken to rein in the deficit and the borrowing requirement. Meanwhile canny consumers will carry on paying off debt, and worrying how long they may keep their job.
We think the UK deficit problems are an important block on the road to full recovery, and continue to prefer assets elsewhere during this period of easier money worldwide.