Belfast Telegraph

Thursday 18 September 2014

Grass may not be much greener on the other side

As I glanced through the weekend press, I detected a growing sense of envy. The UK economy is still struggling to pull its way out of recession while the US economy, apparently, is back to its bouncing best.

Certainly, the numbers from the final quarter of last year seem to support this view. The UK economy expanded at a meagre 0.3% rate, after a small upward revision, but the US economy managed to spurt ahead at a 5.9% rate. What do US policymakers know that ours have yet to discover?

In truth, they don't know very much more. The US numbers are ‘annualised’. They express the quarterly growth rate as if it were to be repeated through a year as a whole. The actual percentage change on the previous quarter, consistent with the UK data, was 1.4%. Admittedly, this is still a whole lot better than the UK managed, but the gap when properly measured isn't quite as big as the headline numbers suggest.

Delving into the details of the two releases, one big similarity is consumer spending where, in both nations, households remain lethargic. True, they are beginning to spend their money again but the pace is muted, reflecting what might be described as a new-found sobriety. Another similarity is inventories. Companies in both nations were either stocking less or, in some cases, rebuilding stocks, the sort of thing that always happens in the first couple of quarters of any nascent recovery, no matter what its eventual strength proves to be. Inventories often amplify the true underlying trend.

The big differences lie in investment and exports. Equipment and software investment has begun to pick up in the US, as have exports. Investment continues to decline in the UK, and exports, although growing, are rising at only about half the pace of those coming out of the US.

But before, I conclude that the US is doing a lot better than the UK, the data under discussion is all for the final quarter of last year. For the US, the new year has not been so encouraging. Two areas have suddenly looked decidedly wobbly. The first is housing, where both new and existing home sales have suddenly slumped, partly reflecting the distorting effects of the homebuyer tax credit, which helped to boost housing demand — temporarily, it now seems — in the second |half of last year.

The second is consumer confidence where, on the latest reading, consumers have suddenly become a lot more cautious. Even though there have been signs of improvement in the US labour mart, it's increasingly clear that US consumers continue to worry about their job prospects.

It's worth going back to the 1930s debate between John Maynard Keynes and the Austrians. For Keynes, economies could settle at different levels of activity, from full employment through to the deficient demand associated with recessions and depressions. The losses associated with these periods of deficient demand could be corrected via government intervention designed to lift animal spirits, thereby bringing markets back to their senses and allowing full employment to be regained.

The Keynesian solution prevented a deep recession from turning into a hideous depression. Yet, from now on, the western world is likely to suffer a Hayekian constraint. We have, collectively, invested in the wrong areas of economic endeavour and wasted huge amounts of money. Whether the resulting debts reside with banks, households, the government or future taxpayers, the consequence is the same: even with signs of recovery, it will feel for a long time as though we are bumping along the bottom. Like it or not, we are heading into a new age of Austrian austerity. Keynes didn't have all the answers.

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