Last Thursday wasn’t a good day for the FTSE 100 index as it went through one of its periodic panics, falling in price by more than 5%.
The market volatility isn’t going away and the blame can be pinned on any number of factors. But many institutional investors will have been troubled by evidence that the German economy is slowing at a rapid rate.
Recent economic data suggests the great hope of the eurozone is now going through its own bad patch as exporters experience a sharp fall in orders.
The grim reality is that German (as well as Swedish, Swiss and Dutch) consumers will begin to rein in spending and this could have an impact on holiday sales for 2012 – an unwelcome development for Tui Travel and Thomas Cook, since both have been heavily dependent on growth in the core German, Swedish and Dutch markets.
It turns out Dutch and Swedish debt levels are much worse than we all thought.
Here in the UK we’re constantly bemoaning the high levels of consumer debt, and barely a week goes by without a newspaper article or piece of research suggesting that trading on the high street will be subdued for years to come. Yet if we look beneath the surface we find many supposedly virtuous countries are in a much bigger mess.
In a July research paper in the Morgan Stanley Monetary Analysts series, entitled “The Lasting Legacy of Leverage”, the investment bank’s analysts looked at consumer debt levels in the euro zone and beyond.
They discovered the supposedly thrifty Danes and Swedes have been significantly increasing debt levels over the last few years, even as the Irish, Americans and Brits have been sharply reducing theirs. The Dutch and Finns have been equally guilty, as have the Austrians and Belgians.
Perhaps the most compelling graphic in this report is the one below – rather than focus on absolute levels of debt relative to income, the analysts look at the changing dynamic of consumer debt between the fourth quarter of 2007 and the last quarter of 2010.
A huge swathe of supposedly saintly countries, including Canada, the Netherlands, and Sweden, have been bingeing on debt while the UK, Ireland and most noticeably the US have been cutting back. In fact, the turnaround in US consumer debt levels is nothing short of extraordinary.
Nearly there yet in the US and the UK?
The Morgan Stanley analysts conclude that the US consumer is finally getting there: “There is, actually, some good news from the champions of deleveraging, the US. American households are actually very close to sustainable levels for both debt service and debt in relation to disposable income, our US team thinks: it estimates the former at 11%-12% of disposable income; the latter in an 80%-100% range.”
Translation: the US consumer is finally conquering their debt addiction.
What about the UK? “The UK consumer has also made some headway on debt reduction (and the increase in the household saving rate is similar to the US). However, our UK team expects ongoing weakness for the household sector. . .”
Translation: we are getting better, but there is more hard work to be done in the next few years if only because we binged so heavily on debt in the last decade.
And the bottom line? Expect the worst if north European consumers start reining back their spending. Maybe the Thomas Cook/Co-op Travel deal might seem a good idea after all.