Tuesday, April 08, 2008
U.K. house prices fell 2.5% in March, from February. This is the largest decline since 1992, and could, not coincidentally, trigger the first U.K. recession since 1992. The fluctuations is the U.K. economy has moderated significantly during the latest decade because of the declining role of the more volatile manufacturing sector and globalization and because previous slowdowns have been immediately met with accelerated monetary expansion. Now however two factors are dragging down the U.K. economy. First of all, the expanding financial sector has started to bust because of the global financial unrest. And secondly, the fact that previous slowdowns were met with monetary expansions means that increasing imbalances have been built up, with overvalued house prices, large external deficits and record debt levels, imbalances not too dissimilar to the one we've seen in America. This means that the problems are much deeper than in the past, increasing the odds for a U.K. recession sometime during 2008 or 2009.