Why Is the U.K. Recovery Outpacing the U.S.?

Regular readers will have noticed a stream of articles suggesting the UK recovery is outpacing the US. Data on unemployment, retail sales, housing and the service and manufacturing sectors confirms this. But both the UK and US economy fell into a bitter and deep recession on the back of a near-collapse in the banking sector. The UK’s reliance on financial services, proportionately, is just as great as in the US. In fact it was more, prior to the recession, as a percentage of total corporate earnings. The UK, like the US, also suffered a housing market bubble with prices far out-stretching reasonable earning multiples.

So why is the UK economy outpacing the US by almost every measure in the race to recover? The answer isn’t in government action and monetary policy. Both countries have enjoyed unprecedented monetary easing and fiscal stimulus.

The answer is in confidence, consumer and business confidence. Despite both nations having a historical devotion to capitalism and the pursuit of material wealth, the average Briton never quite grasped the American dream, and never chased wealth for wealth’s sake quite as hard. British financial aspirations were never as high as the average American’s wealth targets. Thus, when the asset price bubble burst, British expectations and hopes had less height to fall.

If you are hoping and planning for the American dream and that dream falls flat on its face, it kills you. The gap between expectation and reality is too great for you to recover your confidence quickly. If however, your expectations were lower and more realistic, and you suffer a setback, a fall from grace is easier to overcome. You pick yourself up, drink a little tea, cancel the vacation, watch more TV and maybe curse a politician or two, but for you, life more easily goes on.

Comments

[morph366:]

Not to rain on the parade but part of the reason for the greater confidence in the UK at present (I am a resident) is the fact that the government are concealing the true state of the public finances in a way that the US government has been unable to do so well.

All the bad news on public sector cuts, taxation are being postponed until after the next election. Let's see how confident UK taxpayers will be next year when taxes go up and services get cut dramatically.

Jul 16 07:08 AM

[TradingHelp...:]

Morph, thanks for taking the time to read and comment. You are of course right. I too live in the UK, and see those tax rises coming.

Jul 16 08:07 AM

[OldLimey:]

"Regular readers will have noticed a stream of articles suggesting the UK recovery is outpacing the US."

What recovery? Getting worse at a slower pace is not a recovery. With specific regard to the UK, how on earth do you spin this week's employment numbers as a 'recovery'? As for property, maybe if you're living in central London you're seeing some stabilisation as foreign buyers go bargain-hunting, but there is no recovery in any part of the country I'm familiar with. Assuming a recovery by debating its apparent inconsistencies will not, I'm afraid, create one.

Jul 16 09:27 AM

[dybydx:]

well if you believe that too much leverage is the cause of this recession, then it is believable UK is comming out of this faster.

UK has a lower debt to GDP ratio and while they had some crazy 4-to-1 or even 5-to-1 (mortgage to income ratio) home mortgages issued, at least they DID check the guy had income. where as the US offered ninja loans.

if u dont believe debt burden has anything to do with economic recovery, look at cali and their BBB rating.

Jul 16 09:53 AM

[Davewmart:]

The difference in recovery, or more accurately the rate of fall which is quite evident does not in my view relate to the somewhat imponderable reasons given in the article, but mainly to three factors:
The fall in sterling, which is likely to encourage exports, and still more, discourage imports in future, thus leading to an earlier rebalancing.
The tight housing market in the UK relative to the US and recourse mortgages. You can't just hand the keys back, and local Government has an obligation to re-house evictees, not simply letting them live in the back of a car which would reduce 'demand'.
Although house prices against income are inflated, it is difficult to build houses here, and so excesses in physical stock were never so great.
If you are laid off in the UK, although the social cushion is not as great as in Europe, you are a lot better off than in the US, so spending is likely to hold up better in recession.
Fundamentally I feel that the UK is in a worse position than the US, but for the time being the above factors are making it look a bit better.

Jul 16 09:54 AM

[Dave Wrixon:]

Bollocks. If there is any serious cheating going on it is happening in America.


On Jul 16 07:08 AM morph366 wrote:

> Not to rain on the parade but part of the reason for the greater
> confidence in the UK at present (I am a resident) is the fact that
> the government are concealing the true state of the public finances
> in a way that the US government has been unable to do so well.<br/>
>
> All the bad news on public sector cuts, taxation are being postponed
> until after the next election. Let's see how confident UK taxpayers
> will be next year when taxes go up and services get cut dramatically.

Jul 16 12:35 PM

[Davewmart:]

'If there is any serious cheating going on it is happening in America.'

America is certainly hiding how bad things are, but so is the UK on an heroic scale, even more than the US.
Unlike in America, the guarantees that have been issued to the banks are for considerably more than the GDP of the country.
The number and size of off-budget items is also huge, as are unfunded liabilities and future monies to come from 'growth'.
Notable here are public sector pensions, which are tied to final salary in a way not affordable by the private sector for their own pensions.
That adds up to around £21bn a year to feed the public porkers at the moment, when the private sector only manages around £14bn in savings for it's own much more numerous payees.
Needless to say, those figures are due to explode in a completely uncontrolled fashion.

Jul 16 01:55 PM

[Jimbo:]

I began reading this item expecting some kind of empirical data. Instead, I get an impressionistic argument about how the Brits are less materialistic than the Gringos. I will concede that value judgement since I have had the pleasure to cycle and hike all over the U.K. several times. But the author has not made a convincing case.

Jul 16 03:56 PM

[Mike10613:]

I'm British. I pay my credit card off always. I have no debt. I have investments that are doing OK. There is a difference in attitude especially amongst the baby boom generation. Who are angry at the pathetic interest rates on savings. The Starbucks speculators and the buy to let speculators and the anti-regulation spin doctors in governments are to blame. The UK is in a mess and unemployment will get worse. Despite crap interest - people are saving more. The government wants us to spend our way out of recession. When you're broke cut down - don't splash on on a credit card you can never pay off.

Jul 16 05:40 PM

[TradingHelp...:]

Jimbo, thanks for taking the time to read and comment.

I have written a bunch of articles with hard data but this article was designed to provoke comment and discussion and did not pretend to offer a robust solution to the global economic recession.

I wouldn't take the article too seriously, I didn't.

I would much rather be read and disagreed with, than not read at all.


On Jul 16 03:56 PM Jimbo wrote:

> I began reading this item expecting some kind of empirical data.
> Instead, I get an impressionistic argument about how the Brits are
> less materialistic than the Gringos. I will concede that value judgement
> since I have had the pleasure to cycle and hike all over the U.K.
> several times. But the author has not made a convincing case.

Jul 17 04:39 AM

[morph366:]

Re David Wrixon
Much as I love the word bollocks - it really is rather offensive to use against an opinion expressed in these columns.

Jul 17 04:47 AM

[Sober Realist:]

Egads! Are you saying in this little article that the Brits are less motivated and lack initiative; therefore, they accepted a lower measure for success?

On Jul 17 04:47 AM morph366 wrote:

> Re David Wrixon
> Much as I love the word bollocks - it really is rather offensive
> to use against an opinion expressed in these columns.

Jul 17 05:23 AM

[TradingHelp...:]

Sober, I am British.

And I am delighted so many of your have responded to my provocative article with such colourful language and emotion. Thank you very much. My prior "intelligent" analysis never received such attention.


On Jul 17 05:23 AM Sober Realist wrote:

> Egads! Are you saying in this little article that the Brits are less
> motivated and lack initiative; therefore, they accepted a lower measure
> for success?
>
> On Jul 17 04:47 AM morph366 wrote:

Jul 17 06:48 AM