From the TUC

The UK & US Recoveries Compared

28 Mar 2012, by Guest in Economics

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.



4 Responses to The UK & US Recoveries Compared

  1. Honey, I shrunk the economy | Edinburgh Eye
    Mar 28th 2012, 2:39 pm

    […] If our current government wanted to boost the economy, their goal would have been to keep people in work. Even though ideologically the Conservatives object to the public sector, if they wanted a strong economy, they would not have thrown so many thousands on to the dole with the savage cuts that Osborne has been implementing each year, triggering what we see now: an economy slowly collapsing. (If you’re optimistic, a “recovery that’s a lot weaker“.) […]

  2. jonathan
    Mar 28th 2012, 4:36 pm

    I’m sure you’ve seen these bits, lifted from Jonathan Portes’ blog. The first is when ratings were revised up and the second is when they’re revised down:

    “Standard & Poor’s, the ratings agency, revised its outlook on Britain from negative to stable..The Chancellor said: “”That is .. a vote of confidence in the Coalition Government’s economic policies..” Telegraph, 26 October 2010

    “Fitch revised the outlook on the UK’s rating to negative from stable….”A week from the Budget this is a reminder of why it is essential Britain sticks to its plans to deal with its debts,” a Treasury spokesman said…” Telegraph, 14 March 2012

  3. Will M
    Mar 28th 2012, 8:27 pm

    I think Duncan’s argument could be cached out a bit more clearly her, as some commentators seemed to have missed that point / thought that this is about the size of the State.

    The point is that companies (and to an extent households) invest on the basis of their view of aggregate demand. Where the demand from the economy is low / shrinking, companies cut back. This, in turn, *increases* the size of the state as a percentage of the economy.

    By contrast, where the State spends money in order to increase aggregate demand, the ensuing increase in investment (hiring, purchasing of capital goods, etc), *increases* the nominal size of the private sector. Where the State takes care not to continue boosting spending once the economy has returned to robust growth, you will see a *decrease* in the size of the State.

    Thus, looking at recovering the economy being about the size of government is missing the point entirely. This is clearer more than ever in this recovery, where corporates are holding very large amounts of cash on their balance sheets, and have been holding back from investing. Any the reason why can be seen by one glance at GDP numbers.

  4. Why does the media think low growth is a big achievement for Osborne? | Liberal Conspiracy
    Apr 4th 2012, 9:07 am

    […] think the OBR has not adequately taken into account the impact of austerity (show by Adam Posen last week) and I worry that the UK is misdiagnosing a serious demand problem as a productivity […]