How Consumer Frugality Could Hamper U.K.’s ETF

Gone are the days of wanton spending. Austerity is now the dominant theme in Britain and the newfound parsimony may hold back recovery of the economy and single-country exchange traded fund (ETF).

Before the recession, Britain had the world’s highest debt levels relative to discretionary income. But recently, savings rate in the United Kingdom has more than doubled and domestic spending on luxury goods has declined at its fastest rate in decades, writes Mark Scott for BusinessWeek.

Britain’s GDP contracted 5.5% year-over-year in the second quarter, and unemployment is at 7.8% and rising. Prime Minister Gordon Brown cut value-added sales tax to 15% from 17.5% last year and issued a $495 million cash for clunkers program to stimulate domestic consumption.

Consumers are still being tight-fisted with their money. Non-food sales fell 0.7% year-over-year between June to August. Pessimism over the length of the recession has kept consumer confidence at a 12-month low.

Personal borrowing from loans, credit cards and mortgages dropped $1 billion in July. While it’s not helping now, increased saving should be beneficial in the long run since personal debt levels are at 183% of disposable income.

• iShares MSCI United Kingdom Index (EWU): up 31% year-to-date

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