'Financial repression' to hurt UK consumers: analyst

In Britain, deficits are close to levels in the eurozone periphery, inflation is stubbornly high and growth is flat; "financial repression" is coming

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Europe as a whole, not just the eurozone, faces a debt overhang, as “the age of credit-fuelled consumption is over,” according to Albert Gallo, head of European Macro Credit Research at RBS.

He noted that in the UK growth has been stagnating while deficits are close to levels seen in the troubled eurozone periphery countries and inflation has been much higher than in the eurozone.

“Gilts and sterling have lost ground as a result over the past few weeks. Eventually, financial repression through higher inflation and taxes will be necessary to rebalance public finances,” Gallo wrote in a market note.

“This will hurt consumers, who face declining real wages, tight credit conditions and continue to delever as a result.”

The UK, with its strong domestic consumption, has been a very important market for emerging economies, but lately even its usually resilient retail sector has started to sputter.

The debt overhang can be reduced by three methods: defaulting, cutting spending and increasing taxes, and generating inflation, Gallo said, adding that the eurozone had chosen the first two options and the UK the last two.

He noted that the Bank of England quadrupled its balance sheet since the crisis – a higher increase, proportionally, than that of the balance sheets of the European Central Bank or the Federal Reserve.

The Bank of England’s quantitative easing pushed the pound down and prices up, with average inflation at 3.5% since 2007 compared with the eurozone’s 2%. RBS rates strategists expect this trend to continue.


Although the government increased taxes, the budget deficit has remained above 6% of GDP and more austerity and spending cuts are on the way.

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“UK consumers face the prospect of low growth and financial repression through inflation and rising taxes,” Gallo said.

One bright spot is the relatively low unemployment. The UK economy lost fewer than 1 million jobs during the peak of the crisis, half as many as it lost in its previous two recessions in the early ‘80s and ‘90s.

The economy has now recovered most of the lost jobs, but, Gallo said, this came at the price of lower growth in wages, which at 2% since 2009 has been negative in real terms compared with 4% before the crisis.

Consumption growth in the coming years “will remain limited” because real disposable income for households is stagnant, consumer confidence remains low and house prices – with the exception of those in London – remain flat, Gallo said.

Last year was the worst for British retail since 2008, as 54 firms went bankrupt, affecting nearly 4,000 stores and almost 50,000 employees.

This year, two big names on the UK high street – entertainment retailer HMV and video rental store Blockbuster – filed for bankruptcy.

The UK economy got out of recession with a bang in the third quarter of last year, buoyed by the Olympic games, but it shrank 0.3% in the fourth quarter, sparking fears of what some analysts have called a “triple dip.”