Britain's New Scrooges Threaten Its Economy
A new mood of austerity is sweeping Britain. In recent months, savings rates have more than doubled while spending on big-ticket items such as flat-screen TVs has declined at the fastest rate in decades. What's more, official statistics released on Sept. 1 show Britons' $2.4 trillion in personal debt has fallen for the first time since 1993.
The newfound frugality should be cause for celebration. For years, economists have felt British consumers—who have the world's highest debt levels relative to discretionary income (more than a third higher than Americans')—should rein in spending. Many pointed to the thrifty habits of consumers in France and Germany, where double-digit savings rates and a general aversion to credit limited the excesses of the pre-credit-crunch era.
But that was before the Great Recession. Now policymakers fret that Britain's penny-pinching may do more harm than good. "The lack of spending is holding back the recovery," says Andrew Goodwin, an adviser to the Ernst & Young ITEM club, an economic forecasting group.
The economy is in dire need of a boost. Britain's reliance on the financial industry made it particularly vulnerable when global credit markets collapsed. Second-quarter gross domestic product contracted 5.5% year on year, and the jobless rate—usually among the lowest in Europe—is at 7.8% and could soon top 10%. With banks struggling, consumers were expected to come to the rescue. Last year Prime Minister Gordon Brown cut the value-added sales tax to 15%, from 17.5%, in hopes of persuading citizens to open their wallets. Other incentives, including a successful $495 million cash-for-clunkers program, followed.
But aside from a slight bump in spending at the start of this year, consumers don't appear to be parting with their money. Nonfood sales for June to August, for instance, fell 0.7% year over year. And fears that the recession will continue well into 2010 have kept consumer confidence at a 12-month low. "People are scarred from recent experiences," says Alan Smith, managing director at financial adviser Capital Asset Management. "They want to clear debt as quickly as possible."
Total personal borrowing in July—loans, credit cards, and mortgages—fell $1 billion as Britons took advantage of historically low interest rates to rejigger their finances.
The increased saving should help Britain's economy in the long run. With personal indebtedness at 183% of disposable income (vs. U.S. consumers' 134%), the new thriftiness will put houshold finances on a more even keel. In the near term, "the adjustment to less debt will be severe," says Jamie Dannhauser, economist at London's Lombard Street Research. "But it's exactly what Britain has to do."
Where Landing a Job Is Easiest
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Stock Options, Yes. Pension Coffers, No
Last year big companies with employee pension plans put less into funding those promises than they spent on stock grants and options for executives, according to a recent study of S&P 500 companies. The research, published by The Analyst's Accounting Observer, found that the 358 companies with pension plans in the index put $39.5 billion into those programs while giving out stock grants and options worth $44.5 billion. That's despite an aggregate $283.6 billion shortfall in their pension coffers. Jack Ciesielski, who published the research report, says corporations must weigh the payoff from lavishing so much on managers, who bring "uncertain" returns, against the benefits from other spending. Pension obligations are legally binding. So if a plan remains underfunded, a company must eventually make up the difference—usually by borrowing or by diverting cash that could have gone into building the business. Among S&P 500 sectors, financials have the biggest gap, with $15.2 billion going to restricted stock and options vs. $6.4 billion into pension funds. Who spends more on pensions than on stock options? Industrials (a sector that is still strongly unionized), with $7.9 billion for future retirees and $3.8 billion for stock-based executive pay.