US housing crash could bring UK down with it

Here is an article from about two months back. The housing numbers have become increasingly bleak since then however.
I have noticed that they are still experiencing a mini housing boom in the UK but that may change very soon.

I have posited before that this more economically flattened Earth will be more greatly affected if the largest consumer market, (The U.S.) stops buying.

I say the buying has stopped, probably a couple of months ago, the numbers just haven’t come in yet.

Looking ahead we should see a predictable jump in spending in December. Watch for these numbers to be lower than expected however. Holiday sales combined with 06 fourth quarter economic reports should in the first quater of 07 disappoint. This will have repercussions for all emerging economies around the world as lack of orders from the U.S. translate to loss of jobs in foreign markets, resulting in further reduction of consumer spending in those economies.

If somebody doesn’t find a rabbit to pull from the hat very soon, things are going to get ugly.
Vern

This from Briton's Telegraph.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/09/28/cnushouse28.xml

US housing crash could bring UK down with it By Edmund Conway, Economics Editor
(Filed: 28/09/2006)
Your view: Are you worried that the UK could slump into recession next year?
Comment: No avoiding the cold-turkey cure for debt addiction
Disposable incomes hit by higher taxes
Up and down world of US economics

If one of your friends whispered to you that there was going to be a recession next year, you probably wouldn't pay them too much attention. After all, the economy is powering on ahead, isn't it?


Growth this year will be strong, and will endure into 2007, driven by company profits and investment.

We know as much because the Treasury, the International Monetary Fund and other economic authorities have told us so. And, indeed, the consensus forecasts show that growth in 2007 will be 2.4pc, following strong expansion of 2.6pc this year.

But what if that bearish friend of yours happened to be a respected City economist - one whose figures were watched closely by a variety of institutions, including the Treasury?

Peter Warburton, who runs a small consultancy called Economic Perspectives, believes that the UK will slump into a full-blown recession next year, shrinking by some 0.3pc over the 12 months. This would be the worst economic performance since 1991, the last recession, which came amid Britain's ignominious ejection from the European Exchange Rate Mechanism.

Mr Warburton - a member of the Shadow Monetary Policy Committee - warns that the UK will be badly hit by a US housing market crash.
He says: "There is an increasingly large possibility of a scenario where, frankly, economic activity could fall quite materially. In short, I do not believe that the UK has become a more stable economy."

His thesis is that for the past decade, despite its stable growth rate and low inflation, the UK economy has been brewing up potential problems. These include the record level of debt taken on by the household sector, a similarly large jump in government borrowing and a fall in manufacturing output. If, as many experts predict, the US suffers a housing market collapse next year, this could trigger an even more dramatic downturn in the UK.

The reason, he says, is that British companies are particularly reliant on the US for their exports. If they lose much of their custom, they are likely to have to lay off employees, triggering a rise in unemployment and a possible drop in consumer spending.

"The landscape can change quite quickly, and the UK is one of the most vulnerable economies out there," he says. "It's fanciful to suggest that just because corporate balance sheets seem to be in a more healthy state that businesses will carry on spending even if the consumer stops spending.
"You can see that things are already not well in the economy.

Unemployment is up to the highest level in around seven years and the public finances are in a much poorer state than you would ever imagine from an economy growing at 2pc-3pc.

"There is a cauldron of insolvency, which people are trying to pretend is a micro-economic social issue. I think it's a big economic issue.
"Additionally, there aren't any more rabbits we can pull out of the hat."
Grim tidings. And for all that Mr Warburton has been consistently pessimistic about economic growth for a number of years now, his views are an important warning of the dangers facing UK policymakers.

He thinks, for example, that the Bank of England has "seen an inflationary ghost", and its likely decision to raise interest rates to 5pc or beyond could trigger a serious house price tumble.

Perhaps most chillingly for Gordon Brown he believes that the efficiency of the private sector has been slowly eroded by Labour's imposition of stealth taxes and regulation.

Such a miserable outlook is not shared by Trevor Williams, the chief economist at Lloyds TSB Financial Markets. While Mr Warburton was the most pessimistic of all major UK economists, Mr Williams has the brightest outlook, predicting that after expanding by 2.8pc this year, the UK will grow at 2.9pc next year.

For a start, he does not believe that the US will suffer a housing market crash, predicting that it will instead merely see house price growth slow down to more manageable levels - as happened here 18 months ago.
"The global background is quite good for the UK, and we're benefiting from strong growth in Europe and in the US," he says.

"My view is that the consensus developing in the market is wrong. I don't think there will be a crash. I think the economy is fundamentally strong.
"[In the UK] house prices are likely to remain above their long-term valuations for a long time, though there will be a peak to the mini-boom late next year."

Mr Williams's optimism is partly fuelled by his belief that Britain has become a powerful knowledge economy, where growth can be driven by our specialisation in ideas and skills.

For the moment, he is much closer to the orthodoxy. But things change fast in economics, and if the US housing market continues to deteriorate, there could soon be many more joining Mr Warburton's camp.