Adam Posen Explains Why Recovery In The US Has Been Faster Than In UK

This is a transcript of a speech given by Adam Posen who works for the Bank of England. He attempts to explain the faster recovery in the US versus the UK. Both recoveries have been slower than normal but the US recovery has been more robust. The full text of the speech may be interesting those who are interested in how central banks account for economic activity and analyze their data. The highlights are given below.

The shock to both economy's was similar, and monetary policy was similar. Consumption in the US recovered faster (up 12% versus 0), and so did business investment. The level of credit in both countries was similar but the allocation of credit was different. He offers some reasons for the misallocation of credit in the UK, but there was also an interaction between business investment and the faster growth of consumption in the US. Businesses in the US may have been encouraged by increasing consumer demand in the US.

Consumption in the US did not fall as much in the US and it recovered more rapidly. There was also a difference in unemployment. Unemployment was higher in the US, but it recovered smoothly. In the UK unemployment fell but then it moved upwards. That had an effect on consumer confidence and on consumer spending. Higher energy prices in the UK also affected consumption but fiscal policy accounted for 3% of the difference in GDP between the US and the UK. The VAT was raised in the UK as part of its austerity package. The multiplier was also higher in the UK so that the decrease in disposable income had a large impact on GDP.
The budget deficits in the US were larger and acted as a stimulus to the US economy.