Compare how the UK and USA recovered from recession


by Duncan Weldon    
11:05 am - March 29th 2012

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The Bank of England’s MPC 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. Why?

And this has manifested itself in both investment:

And in consumption:

What explains this widely different economic performances?

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.

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About the author
Duncan is a regular contributor. He has worked as an economist at the Bank of England, in fund management and at the Labour Party. He is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.
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Reader comments


OK, so the UK government’s ‘austerity’ programme is “a major factor ” or plays “an important role” in explaining weak growth. (Tell us something new, please.) But it simply does not follow from this that the ‘austerity’ programme is misconceived or the wrong thing to do. I might argue that it is the right thing to do, but that the depreciation of sterling, the eurozone crisis…etc have worsened the impact, and that all will come right sooner or later – perhaps too late electorally.

As for the comparison with the US, this is largely disingenuous coming from a TUC employee, because you are not applying like with like. An Obama-style Keynesian stimulus in the USA’s ‘hire-and-fire’ labour market will surely have a more dramatic effect than the a similar stimulus in the highly regulated labour market.

Would the TUC exchange employment regulation for Keynesian stimuli? (No; I thought not.) And, long-term, is Obama’s policy the best for the USA and the world economy: somehow, I doubt it, even though I hope he is re-elected (and re-appoints Hilary Clinton, please)?

i think the austerity programme is necessary, but the Gov’t has overplayed the messaging and many international businesses are holding back capital or seeking to put it elsewhere. We’re in a global market place and I fear that the narrative on the deficit has been playing to a national audience without consideration for the international impact on UK Britain.

Britain open for business just doesn’t cut it!

People aren’t earning to spend. They are scared they will need private health insurance. Any recovery needs people to buy. They are too scared. And poor.

Our recovery is not just worse than the US performance. Even Japan in the early 1990s recovered better than the UK is doing and that is generally known as an awful performance. I think part of the reason is the way British firms in the recession hoarded labour and they are still doing it. The US economy shed labour at a phenomenal rate and the later recovery has been more V-shaped as a consequence. Their productivity improved with the shedding of labour and as a consequence there was more incentive to invest compared to the UK where productivity languished. Why British firms have chosen to hoard labour is far from obvious. Possibly it would have been better for the UK recovery if unemployment had gone higher during the slump. Obviously not for the unemployed. Remember, guys like Danny Blanchflower missed their unemployment forecasts by 1 million workers.

The coalition came into office promising to stabilise the UK economy and they certainly stabilised things. Unfortunately, they appear to have stabilised us in stagnation. Their affects on expectations in the second half of 2010 was to collapse them.

Another important factor that possibly explains the anaemic UK recovery is how they are conducting the fiscal consolidation. The best international practice says that you should front-load the spending cuts and only raise the tax yield at the back-end of the consolidation. We are doing it the opposite way. Not all the tax rises are from the coalition. Labour had planned some and the coalition stuck to them and added some of their own. I suspect the reason why they front-loaded so many tax rises was to do with electoral cycle calculations. The plan was to do the consolidation that way and have a tax giveaway budget just before the next election in 2015. Kind of backfired as GDP growth stagnated.

Overall, the UK economy is very much a mixed bag. Government consumption, construction, retail and some parts of finance are what is stagnating GDP. Other sectors such as manufacturing are doing very well. Employment in manufacturing is still below pre-recession peaks but they have healthy order books. Even agriculture has growing employment for about the first time in two centuries as food and drink exports to emerging markets are booming. Getting construction growing would be an obvious and relatively easy thing to do. There are some tentative signs that the government recognise that.

5. David Ellis

America’s QE programme has made the Brit version look half-arsed because they have until now been able to absord the inflation better as the dollar isn’t weakened as quickly by reckless printing as the pound is. It is just short termism designed to buy Obama another four years but it will catch up big time and already is as Gold has resumed its endless rise in value as the world’s currencies become debased and worthless. Obama’s just got to hope November comes quickly not that he’ll be able to do anything with his second term in the teeth of a falsely postponed and deepend financial crisis. Nothing and nobody can save capitalism from its bankruptcy. Who’d want to save it anyway?

@ 4:

“The US economy shed labour at a phenomenal rate and the later recovery has been more V-shaped as a consequence. Their productivity improved with the shedding of labour and as a consequence there was more incentive to invest compared to the UK where productivity languished. Why British firms have chosen to hoard labour is far from obvious. Possibly it would have been better for the UK recovery if unemployment had gone higher during the slump.”

Errrr…too much labour regulation in the UK economy, perhaps?

7. gastro george

Did I wander into a saloon bar?

“Why British firms have chosen to hoard labour is far from obvious”

No, it’s quite simple really. To survive in a recession you keep your skilled and experienced staff as they are the ones who will not be available in an upturn as they will find other jobs if you lay them off. Firms that have invested in skilled workers don’t like losing those investments. In a knowledge and service based economy where contacts and networks come with staff this is more important than in manufacturing economies where there are more unskilled staff. Secondly many of the unskilled staff in the UK were migrant workers who could easily go back home and not appear in unemployment stats.

9. Osbournes Excuses

Wonder what Osbourne’s excuse will be this time?

Who is up for Osbourne Excuse Bingo? http://economytoday.co.uk

Duncan,

Now show us the same charts with the rest of Europe on it. You’ve totally ignored the effects of recession in the UK’s biggest trading partners – my guess is intentionally.

You also totally ignore even information in the paragraph you quote – British household incomes have been hit far harder than in the US thanks to the depreciation in Sterling on energy prices – which the government has no control over. Not only that, but bad debts are being dealt with far faster and more effectively in the US, also affecting household incomes and consumer spending.

Then you jump to a conclusion that it’s all about austerity. Which it clearly isn’t. Nor do you give any credible alternative – though given the chance i’m sure you would argue for continued increases in spending in a Keynesian fashion.

Which would be totally pointless, as any increased growth thanks to this continued fiscal incontinence, which would by no means be guaranteed, would be quickly be eaten away by more nominal debt, higher interest rates, an almost certain ratings downgrade all leading to higher debt servicing costs and a weaker currency still.

Frankly, if you think that maintaining a 10% budget deficit is sustainable and not expansionary, you are on another planet….not least as it has been shown that long term growth is adversely affected by about 1% of GDP once debt/GDP crosses the 90% level.

11. gastro george

@8 Planeshift

Exactly – as any sensible manager would know. Is it surprising that both Germany and Japan “hoard labour” as a general policy in a downturn?

@ 8. Planeshift

Some of those factors may well be plausible at the micro level. However, they do not really explain the macro. For example, the UK labour market appears to violate Okun’s Law. Not actually a law but an observation relationship. http://en.wikipedia.org/wiki/Okun%27s_law

Moreover, considering the fall and loss of output in the UK, the labour market has behaved differently compared to previous slumps and the experience of peer economies. The US experience was typical and the UK was unusual. May partially explain the respective recoveries.

HSBC analyst discussing the puzzle.
http://www.hsbcnet.com/gbm/global-insights/insights/2012/puzzle-of-uk-productivity.html

Actually, when you look at real statistics, it is clear government spending is being maintained: http://www.ukpublicspending.co.uk/spending_chart_1990_2015UKk_11s1li111mcn_F0t

Also, as if out of all the variables that can contribute to GDP, you honestly expect us to believe that your little left wing point is the main one.

Please

14. gastro george

In a new revelation, somebody discovers that government spending rises in a recession … who’d've thought it.

Hahaha, you actually think the US’s economic action is what helped it recover faster. Oh dear. Back to school.

To do so, about three years late and after a failed stimulus, the US’ debt is now $15 trillion, which is just going to hit even harder when the bills need paying. Greece writ large. That’s the answer? Really?

Whatever else, this and the warning from the OECD about the likelyhood of a double-dip recession, have shown that the diagnostics of the Keynesians among us have proved more dependable than those of the Micawberites.

To put it crudely, the post is just TUC propaganda – designed to pander to the prejudices of the deficit-deniers.

19. Leon Wolfeson

@13 – The money’s being spent on propping up the walls you’ve undercut, yes. You were never going to save money mining the foundations.

But you’re now advocating dropping explosives down there.

@18 – How many million in poverty will satisfy you? How many dead? Blood for your Corperatist god!


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    #UK : Compare how the UK and USA recovered from recession http://t.co/G9zyf5kA

  8. Duncan Weldon

    @abelardinelli Some charts on the UK & US compared from Adam Posen. http://t.co/bRMAtaeO

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    Compare how the UK and USA recovered from recession | Liberal … http://t.co/fCPScrbk

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    @anthonypainter @georgeeaton MPC's Posen reckons big impact of austerity in UK. http://t.co/bRMAtaeO

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    @anthonypainter @georgeeaton MPC's Posen reckons big impact of austerity in UK. http://t.co/bRMAtaeO

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    No surprises here RT @libcon: Compare how the UK and USA recovered from recession http://t.co/kmMcuQBe

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    ?lanak koji uspore?uje razliku oporavka ekonomija UK i USA te zapravo potvr?uje strategiju HR koalicije http://t.co/VyuU5MMJ #politikahr

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