The UK & US Recoveries Compared
Bank of England Monetary Policy Committee member Adam Posen made a very interesting speech yesterday comparing the US and UK recoveries. It’s well worth a read, or at the very least a quick look at the charts at the back.
Some of these charts are rather striking – the UK recovery has been an awful lot weaker:
And this has manifested itself in both investment:
And in consumption:
What explains this widely different economic performances?
Equally critical to investment and to stockbuilding as sources of the US relative growth advantage, however, was the underlying growth that drove them. Consumption grew more strongly in the US than in the UK, with consumption growth stagnating in the UK from Spring 2010 onwards. Deleveraging by households was not a major factor, given the comparable state of US and UK balance sheets. The contrasting directions of employment trends raised uncertainty in the UK over the US during the latter half of the recovery, which weighed on consumption. Fiscal policy, however, played an important role as well. Cumulatively, the UK government tightened fiscal policy by 3% more than the US government did – taking local governments and automatic stabilizers into account – and this had a material impact on consumption. This was particularly the case because a large chunk of the fiscal consolidation in 2010 and in 2011 took the form of a VAT increase, which has a high multiplier for households. The fact that British real incomes were hit harder than American households’ incomes by energy price increases could be ascribed in large part to the past depreciation of Sterling, which also hit real incomes directly. All combined, these factors significantly dampened consumption growth in the UK, with knock on effects on investment and stockbuilding. (My emphasis)
In other words the UK government’s aggressive austerity programme is a major factor explaining weak growth since the Spring of 2010.