Why recovery is better in US and not UK?

This continued posting of poor GDP growth nos by UK has been a hot topic of discussion.  Pro-Keynes cite victory for their club and say it shows fiscal austerity worsens growth prospects.

A nice speech by Adam Posen of BoE on the topic (as always).

He says despite similar institutional systems and crisis policy responses, US recovery has been faster. Why?

My basic goal is to offer an explanation why the US economy has had a better recovery than the UK economy from the global financial crisis so far. Our economies suffered largely the same type and size of shock at roughly the same time, and our respective central banks have pursued roughly the same type and size of counter-cyclical policy response – thankfully, in my view. Yet, the US has had significantly more GDP growth with somewhat lower inflation over the last thirty-two months than in the UK. Why is that? It seems to me that there are three sets of explanatory factors:

  • Corporate investment rebounded much more in the US than the UK because
    • there were more non-bank options available to provide financing for investment 
    • there was less spillover from euro area risks on to the US than the UK banks
  • Household consumption rebounded much more in the US than the UK because
    • there was significantly less net withdrawal of fiscal stimulus in the US than UK
    • there was a greater rise in energy costs faced by the UK than US consumer
  • Inflation was higher in the UK than in the US because
    • the UK fiscal tightening took in part the form of a Value-Added Tax increase
    • Sterling depreciated more and more rapidly than the Dollar did

Good speech full of graphs. Helps get some clarity on the UK economy’s sluggish performance..

One Response to “Why recovery is better in US and not UK?”

  1. willfeins Says:

    Great post! It gives us an idea about how the US economy is able to recover after an economy crisis that has greatly affected the global market. The points given by Adam Posen in his speech is a wake up call for countries that are looking for strategies in restoring their economic stability. Corporate investment and household consumption are two aspects the government should focus on. Corporate investment is an area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make them. Good luck to UK economy, let’s hope the US economy keeps rising

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