Some people are never satisfied.
The evidence is mounting that the UK economy is now on the path to recovery. But to those who denied the possibility of any economic revival at all under the policies of “austerity”, this is simply not good enough. It is the wrong kind of recovery, they say. Fuelled by debt-based personal spending, unsustainable house prices, another crash, the doom-mongering litany more or less writes itself.
The data-based evidence of the recoveries in the US and UK economies tells an interesting story, but not one that the pessimists like to hear. There is no doubt that overall growth has been weaker than usual after a recession. Comparing 2012 with 2009, the year when both economies hit rock bottom, real GDP grew by 7.3 per cent in the US and by only 3 per cent in the UK.
Still, growth has actually happened. But has it been fuelled by personal consumption, by individuals running down savings or taking on more debt in an unsustainable way? The answer is unequivocally “no”. Personal spending is by far the biggest single component of GDP, accounting for over 60 per cent of the total. But in both cases, over the 2009 to 2012 period, it grew by less than GDP. By less, not more. Personal consumption rose by 6.9 per cent in the US and by 1.6 per cent in the UK.
In both the main Anglo-Saxon economies, a marginal contribution to growth was made by an improvement in the net trade position. In each case, exports in real terms grew slightly faster than imports, though the impact on GDP was small.
But the two other components of GDP – investment by companies and current expenditure by the public sector – offer a marked contrast between the US and the UK. Despite the widespread belief that austerity policies are being rigorously pursued in the UK, current public spending grew by 3.3 per cent in real terms between 2009 and 2012. In the US, meanwhile, it fell by 4.1 per cent.
And contrary to much received wisdom, investment by companies in the UK did grow over this period – by just over 10 per cent. But in the US, the comparable figure was a rise of almost 30 per cent. Capital spending by companies makes up only around 15 per cent of total GDP, but this huge difference between the two countries accounts for most of the difference in the recovery patterns in the US and the UK. GDP grew by just over 4 per cent more in the US, and three quarters of this is accounted for by buoyant corporate investment. The growth rate of personal consumption relative to GDP was lower, not higher, in the UK than in the US, and this basically accounts for the rest.
In neither Britain nor America is the recovery based on flimsy, ephemeral debt-based consumer spending. It is grounded in capital investment by firms. And the US has made way for this by not just talking about cutting public spending, but by actually doing it.
As published in City AM on Wednesday 28th August 2013