While almost everyone expects a rate increase to be announced by the Federal Reserve's Federal Open Market Committee today -- you can check it out here, here, here, here, and here, for just a small sampling -- the Bank of England may be headed in the opposite direction. From the Financial Times:
British economic growth in the first quarter was sharply revised down on Thursday, adding to expectations that the Bank of England would try to stop the economy’s downward trend by cutting interest rates this summer.
Meanwhile in the United States, we have this report from Bloomberg:
The U.S. economy grew at a 3.8 percent annual rate from January through March, matching the pace in the previous three months and suggesting Federal Reserve policy makers will keep raising interest rates to ensure inflation doesn't accelerate.
As is clear from the details of the Bureau of Economic Analysis's GDP report, the robust housing market, while not the only story, was a big a part of the picture on the left side of the Atlantic:
Business fixed investment, which includes spending on commercial construction as well as on equipment and software, rose at a 4.1 percent annual rate in the first quarter. That compares with the preliminary first-quarter estimate of 3.5 percent and a 14.5 percent gain in the fourth quarter...
Residential construction increased at an 11.5 percent annual rate in the first quarter, revised from an 8.8 percent pace estimated last month. At the same time, the government's measures on prices were revised down in part because prices of single- family homes rose less than initially reported.
Consumer spending, which accounts for more than two-thirds of the economy, expanded at a 3.6 percent annual pace, the same as estimated last month and compared with a 4.2 percent rise in the fourth quarter. Last year's consumer spending growth of 3.8 percent was the most since 2000.
Consumer spending in the U.K, on the other hand, is showing the strain of slower growth and a stall in housing price appreciation. Again from the Financial Times:
The annual rate of growth for the first quarter was revised downwards more sharply from an initial estimate of 2.7 per cent to 2.1 per cent...
The revisions were due partly to upgrades of growth in previous years which underlines the extend of the slowdown since last autumn when higher interest rates dampened consumer spending...
Under the [Office for National Statistics’] new revision, household consumption expenditure only grew by 0.1 per cent between the fourth and the first quarter, the worst pace of growth since the year 2000.
Thanks to consumer’s reluctance to part with their money, the closely-watched household savings ration improved between the fourth quarter last year and the first quarter of this year from 3.9 per cent to 4.8 per cent.
Not everyone is impressed with the U.S. performance, however, and there are plenty of people waiting for the U.S. housing market to hit the wall. So many, in fact, it's hard to know where to start, but this post (from Calculated Risk wearing his Angry Bear hat) is as good as place as any to begin. If that happens, some think that U.K. may just be a leading indicator of things to come in the United States. From Reuters' Mike Dolan:
The U.S. housing boom need not end in some dramatic crash -- if the example of Britain or Australia is anything to go by -- but even a flattening of prices may feel as painful for overstretched homebuyers.
A surge in U.S. house prices, which have jumped 50 percent nationally in just 5 years and 12.5 percent in the past 12 months alone, started later than decade-long accelerations in the UK and Australia, which leveled off this year.
The problem, still being played out in these markets and deemed a salutary lesson to U.S. homeowners, is that even the prospect of flat or low single-digit price gains may be enough to create problems for increasingly leveraged Americans.
The flattening in Australian and UK house prices has reminded buyers that double-digit gains are the exception, not the long-term rule
Beware the end of the conundrum, says Dolan's report:
"There are some disturbing parallels emerging between the boom in the U.S. and the later stages of the housing bubbles in the UK and Australia," said Paul Ashworth, senior international economist at the London-based Capital Economics.
"These similarities suggest to us the U.S. boom is entering the finishing straight."
House prices inflation in the both UK and Australia halted or even eased within 12 to 18 months of the first of five rate moves, even though the short-term rate increases by the Bank of England and Reserve Bank of Australia were historically modest...
British interest rates started to rise in November 2003. They climbed in five quarter-point moves to 4.75 percent over the following year, with the last in August 2004.
The UK housing market lost significant momentum by the third quarter of 2004, with annual price gains slowing to 5.5 percent in the first quarter from 17 percent early last year...
"It is absolutely no coincidence that residential property prices first started flattening out in Australia, and then in the UK," Andreas Rees of Germany's HVB bank said in a recent note. "We expect the same pattern to occur in the U.S."
You've been warned.
On related note, have a look at Kash's discussion of international saving rates.