Another Peek into Our Future?

The Financial Times reported the other day that inflation in the U.K. has reached a seven year high. Prices for consumer goods, as measured by their consumer price index, have reached the horrifying level of 2.0 percent, up one-tenth of one percent from last month.

[Given what we've heard about the U.K. housing boom in recent years, to obtain a number this low, it's a pretty safe bet that housing prices are not included in the reported number, and they probably perform some statistical wizardry in other areas - just like their Anglo Saxon brethren across the Atlantic.]

After many interest rate increases over the last year or so, the Bank of England is widely expected to cut interest rates at its August meeting in response to flagging retail sales and a housing market that appears to have peaked. However, there is some concern that, due to rising energy and raw material prices, inflation will continue to rise at the same time that the Bank of England shifts to a more stimulative policy.

Is this another peek into our future?

Probably.

Many have been saying that the U.K. economy is six to nine months ahead of the U.S. economy when considering real estate price movement, interest rate changes, home equity withdrawal, and consumer spending, but there are two other important similarities between the two economies - current account deficit and budget deficit.

In these two important ways, the U.K. economy is almost a miniature version of the U.S. economy. If you flip to the back of the print edition of The Economist magazine, to the Economic and Financial Indicators section, then navigate to the table marked Trade, Exchange Rates and Budgets, these similarities become clear:


Click to enlarge

Looking at the Trade Balance (first column) and then looking at the Budget Balance (last column), there are four countries with negative numbers for both. Expressed as a percent of GDP, the data is as follows:

1. U.S. - Current Account = -6.3%, Budget = -4.1%
2. Italy - Current Account = -1.2%, Budget = -4.4%
3. U.K. - Current Account = -2.5%, Budget = -2.9%
4. France - Current Account = -0.3%, Budget = -3.0%

The U.S. is the clear leader when adding the two imbalances, and Italy and France clearly have budget troubles, but look at the U.K. with it's near equal imbalances in trade and government spending. In fact, when considering the aging populations and government promises, European budget deficits are pretty routine - Germany clocks in with a -3.5% budget deficit, however, they are net exporters.

Also of note in this table is Japan's gargantuan budget gap of -6.1% of GDP. Their total government debt exceeds their GDP, something that no other country comes close to matching, however, they too are net exporters.

Of all the developed countries in the world, when it comes to imbalances, the U.S. seems to be most like the U.K. - watch closely, we may be seeing our future.