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Posen on slower growth in the UK compared to the USA
30th March 2012
Adam Posen is a member of the Monetary Policy Committee featured in Extract 1 of the OCR F585 paper for June 20120. He has consistently argued that the Bank of England should maintain their policy of ultra-low policy interest rates and also expand QE if and when the economic conditions require it. In a speech to the National Institute this week, Adam Posen contrasted the differences in economic recoveries in the United States and the UK.
He claims that
“The US recovery from the global financial crisis has been faster, stronger, and less inflationary than that in the UK, at least so far. Both economies hit the trough in GDP in the second quarter of 2009, and have been expanding since then.”
He argues that a number of factors help to explain the relative weakness of the upturn in the UK:
1/ Business capital investment has rebounded much more in the US than the UK because there are non-bank options available to provide financing for investment. The spill-over effects of the Euro Zone crisis on US banks have been lower than here in the UK. Posen criticises the lack of competition in the UK banking system
2/ Consumer spending on goods and services has recovered more in the US than the UK because of a smaller and slower withdrawal of the 2008-09 fiscal stimulus in the US than UK. Real incomes in the UK have been hit harder in part due to a greater rise in energy costs faced by the UK than US consumer. The household savings ratio has grown in the UK because of a fall in the ratio of wealth to income and deep uncertainties and insecurities about future incomes and jobs. Posen writes that “All told the UK consumer suffered a set of severe one-time shocks to real income in 2009-2012, most of which we can hope are now coming to an end.”
3/ Inflation has been higher in the UK than in the US because the UK fiscal tightening took in part the form of a Value-Added Tax increase (to 20%) and sterling depreciated more and more rapidly than the Dollar did
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.