The UK has seen a weak recovery since 2009, one marked by poor productivity and a disappointing growth in exports. Some believe that "zombie" companies are partly to blame. The argument runs that, sustained only by low interest rates and forbearance by banks, such companies hog resources and hinder a cathartic process of corporate restructuring.
The zombie company argument fits with views of so-called Austrian school economists. For them the "creative destruction" of uncompetitive businesses frees resources for more productive uses and, in time, regenerates economies. Some Austrian economists think the UK's problem – and more widely Europe's problem - is that it has had too little economic change, not too much.
America's experience over the last five years of the financial crisis sheds light on this debate.
America's economy has long been widely seen as more flexible, and quicker to adjust to economic shocks, than European economies. Two popular manifestations of this view are the claims that America has a "hire 'em and fire 'em" jobs culture and that being declared bankrupt is a rite of passage for US entrepreneurs.
So what does the experience of the Global Financial Crisis tell us about such generalisations?
The US recession of 2008/09 was milder than the UK's. Yet measured in terms of jobs, corporate insolvencies, housing and credit, America saw a sharper downturn, and a swifter upturn, than the UK.
American employers proved far more willing to make employees redundant than their UK counterparts, pushing unemployment to a peak of over 10% of the workforce, significantly higher than in the UK. Whilst US employers were quick to fire, America's jobless rate has fallen much faster than the UK's in the last three years.
The downturn also inflicted significant damage on the US corporate sector. US business insolvencies rose by 178% during the recession while UK insolvencies rose by 57%. Now insolvencies are falling at a faster rate in the US than the UK.
US housing has also undergone shock therapy. House prices fell by 34% from peak to trough while UK prices dropped by 22%. America's housing bubble has burst but UK housing still looks pricey. The Economist estimates that relative to rent costs US housing is 7% undervalued, UK housing 21% overvalued.
America has also managed to get banks lending more swiftly than in the UK. Lending to US households and corporates collapsed in 2009, but is now growing by 5% year on year. In the UK bank lending is still contracting.
So, faced with a milder recession than Britain's, America's private sector seems to have adjusted more swiftly. That has meant greater pain, in terms, for instance, of job losses and business failures. But quick adjustment may also have paved the way for an earlier recovery.
By firing workers quickly US firms managed to maintain productivity and boost competitiveness through the downturn. The result has been a sharp rise in exports and a narrowing of America's trade deficit.
The UK experience is the exact opposite. Companies held on to staff and productivity and competitiveness fell. This has contributed to a disappointing export performance and a widening of the UK's trade deficit.
Unsurprisingly, it has been British, not American, economists who have been worrying about zombie companies. Over the last 2 years, the term zombie companies has been mentioned five times as often in the UK press than the US press.
The contrasting attitudes of business on either side of the Atlantic can also be seen in capital spending. US corporates slashed capex during the downturn but have since raised it by over 20%. UK corporates cut less in the recession but have scarcely increased investment since 2009.
Of course not all of these differences can be attributed to the US being a more flexible economy. Change in different parts of an economy is affected by numerous factors, just one of which is the flexibility of markets.
The US, for instance, has been relatively insulated from the euro crisis. American exports are far less dependent on the euro area than UK exports. The US economy has also benefited from the fracking revolution. It has led to sharp falls in gas prices and fostered a growing sense of confidence about the outlook for energy supply in America.
But the experience of the last five years fit with the idea of America as an economy which is quick to adjust. During the downturn the result was a sharp rise in unemployment and business failures. But that same flexibility has helped deliver improved competitiveness, cheaper housing and renewed growth in credit.
With such a starting point the US looks set for more buoyant growth over the next couple of years than the UK.
MARKETS & NEWS
UK's FTSE 100 ended the week up 1.0%.
Here are some recent news stories that caught our eye as reflecting key economic themes:
KEY THEMES
- US house prices rose by an annual rate of 5.5% in November, the fastest rise in 6 years – US housing
- UK mortgage approvals rose in December to their highest levels since January 2012 – UK housing
- UK manufacturing activity expanded in December at its fastest monthly rate since September 2011 – manufacturing
- The UK faces a "significant" risk of losing its AAA credit rating due to a worsening economic outlook, according to Fitch Ratings – slowdown
- Official figures show that 29,065 Spanish residents and 658 legal entities took up the Spanish government's offer of a tax amnesty, which ended in November 2012, raising €1.192bn in new tax revenues – Spain
- A total of €93bn of private capital flowed back in to peripheral European countries in the last 4 months of 2012 according to data from Dutch bank ING – eurozone
- The US economy contracted at an annual rate of -0.1% in Q4 2012 according to preliminary figures from the Bureau of Economic Analysis, the first contraction since 2009 – US growth
- Eurozone business confidence grew faster-than-expected in January, driven by strong rises in confidence in Germany, Spain and the Netherland – eurozone
- Eurozone manufacturing activity rose in December to its highest level for 11 months according to purchasing managers data – eurozone
- Spanish retail sales fell by 10.7% in December compared to a year earlier, the 30th consecutive month of contraction – Spain
- The total balance owed by UK consumers on all personal loans reached its lowest level since August 1999 in December, according to data from the British Bankers' Association – consumer deleveraging
- The Reserve Bank of India reduced its main interest rate for the first time in nine months, to 7.75%. The move was expected after inflation fell to a three-year low – emerging market easing
- Moody's completed the review it started last autumn of six Canadian banks and downgraded the credit ratings of all of them because of mounting levels of consumer debt as a result of rising house prices – Canadian boom
- France's labour minister Michel Sapin claimed that the country is "totally bankrupt" – euro crisis politics
- The Zimbabwean Finance Minister claimed the recession-hit country has only $217 left in its public accounts, with the regular wage bill for civil servants totalling 73% of the country's budget – Zimbabwe
- The Japanese government unveiled a budget for 2013/14 that for the first time in 4 years will raise more revenues through taxes than bond sales– Japan
- Online retailer Amazon announced record Christmas sales of $21bn, an increase of 22% since December 2011 – Amazon
- On-line sales of eyewear (glasses) in the UK have doubled since 2007 – on line change
- The value of contracts handed to the private sector by the UK government has more than doubled in the last four years – public sector cost saving
- Netflix's new $100mn 13 episode production of House of Cards was released simultaneously around the world on Friday to users of the company's service. The move was hailed by Netflix's CEO as a "defining moment in the development of internet TV" – innovation
- Royal Dutch Shells fourth quarter profits were dragged down by the depressant effects of America's shale gas boom on US natural gas prices which hit 10 year lows last spring – shale gas revolution
- Southern Norway is experiencing a nappy shortage after a supermarket price war attracted shoppers from neighbouring eastern European countries who have bought stock in bulk, with prices less than half of what they are in Lithuania – nappy shopper
Regards,
Ian
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