Yesterday I reported Deflationary Hurricanes to Hit U.S. and U.K. Confirmation that the U.K. is about to follow the U.S. in recession is at hand.

Bloomberg is reporting U.K. Manufacturing Contracts Most Since 2001.

U.K. manufacturing contracted in June by the most since 2001, a sign higher credit costs and soaring commodity prices are bringing the economy closer to a recession.

An index based on a survey of more than 600 manufacturers by the Chartered Institute of Purchasing and Supply fell to 45.8, from 49.5 in May, Reuters said today. The median forecast in a Bloomberg News survey of 34 economists was 49.8. A reading lower than 50 signals contraction in factory production, which accounts for 15 percent of the economy.

The report suggests the slowdown has spread from the rest of the economy after house prices fell in June by the most since the end of the last recession. With inflation accelerating, policy makers are now considering whether they can risk raising interest rates to bring prices under control.

A CIPS survey for May showed services contracted for a second month in May and probably did so again in June, according to the median forecast of 33 economists. CIPS will release that data, which excludes retailers, on July 3. Services make up three quarters of the economy.

King told lawmakers on June 26 “the economic slowdown will need to be sufficient to ensure that inflation does not persist above the target” of 2 percent for consumer prices.

U.K. House Prices Plunge

Bloomberg is reporting U.K. Annual House Prices Declined by Most Since 1992.

Real-estate stocks had their worst performance in more than 20 years in the second quarter and Bank of England Governor Mervyn King predicts “extremely weak activity” in the housing market. Mortgage approvals fell to the lowest in at least nine years in May and consumer confidence deteriorated to the lowest level in 18 years last month, reports showed yesterday.

Falling house prices risk pushing the U.K. economy into recession, as slowing growth and falling confidence curbs Britons’ spending. King said June 19 that “lower demand in the high street will go hand in hand with lower demand in the property market.”

Banks granted 42,000 loans for house purchase in May, compared with 57,000 in April, Bank of England data showed yesterday. An index of consumer confidence fell to minus 34 in June, the lowest since the London riots in 1990 before Margaret Thatcher’s downfall as prime minister.

King told lawmakers on June 26 that there may be “big movements” in house prices as the property market goes through a “period of adjustment.” The Bank of England predicted in May that the annual rate of economic expansion will drop to around 1 percent, the lowest since 1992.

Still, accelerating inflation makes it more difficult for policy makers to kick-start economic growth by cutting rates. Consumer prices jumped 3.3 percent in May from a year earlier, the most in more than a decade.

I am stunned at how few actually understand what the threat here is. And it sure is not inflation. I guess that is what it takes for deflation to really catch hold: no one sees the threat.

Technically, from an Austrian economic perspective, deflation is not a threat but a necessary process to cleanse out the excesses of the previous cycle’s malinvestments. In this sense “threat” is from the myopic point of view of the central bankers. With that in mind, please consider Greenspan’s 2003 concern:

An Unwelcome Fall In Inflation

Current central banker screams of vigilance about inflation are in stark contrast to Greenspan’s November 2003 warning about deflation as follows: Indeed, the Federal Open Market Committee has judged that the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level.

Central bankers were worried about deflation when housing was strong and the ability of consumers to take on debt had not reached its saturation point. Now with debt saturation maxed out (Peak Credit), housing plunging like a rock in the US, UK, Spain, Ireland, and Australia, unemployment soaring, and zero chance of a wage price spiral (at least in the US), central bankers are shouting inflation. Oh the irony of it all.

Mike “Mish” Shedlock
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