UK: Deloitte Monday Briefing: US Growth Returning To Pre-Crisis Levels

Last Updated: 25 February 2014
Article by Ian Stewart

Most Read Contributor in UK, August 2017

* America suffered its worst recession in half a century in 2008-09 but has since bounced back.

* America's flexible and market-orientated economy was quick to adjust to the initial shock of the financial crisis. America's recession was milder than the UK's, but house prices fell faster in the US than in the UK and layoffs and company liquidations rose at a faster pace in America than in the UK.

* The adjustment to the crisis was painful but helped reduce excess in the US economy and paved the way for growth.

* The bursting of the housing bubble made housing affordable and ignited a strong housing recovery. Despite recent double-digit rises, US house prices remain below their 2008 peaks and housing is 10% undervalued against a long-run average of disposable incomes.

* The financial crisis originated in the US but the resulting credit crunch inflicted less damage on America's economy than many had feared. US business is less dependent on bank finance than its European counterparts, with a diverse range of alternatives including the commercial paper market and bond finance. This helped US business weather the credit squeeze. In any case, US banks were quick to restructure and soon returned to lending to corporates and consumers. It is significant that after a decade of underperformance, shares in US banks have outperformed their global peers in the last three years.

* Redundancies helped American companies maintain productivity. The World Economic Forum ranks the US as the world's fifth most competitive economy in a field of 148; China is in 29th position. The relentless tide of off-shoring of US manufacturing shows signs of turning. The talk now is of on-shoring as companies including Apple and Motorola re-start production in the US.

* Luck has played a part too. The US economy is oriented to the Americas and Asia and has been relatively insulated from the effects of the euro crisis. The exploitation of its vast shale reserves has created a powerful source of competitive advantage for the US economy. US oil and gas output is at the highest level in decades and domestic heating bills and industrial costs have plummeted. Next year, the US is forecast to overtake Russia as the world's biggest gas producer.

* America also ran an expansionary fiscal policy for longer, not undertaking major deficit reduction until 2012. This helped sustain demand, leaving the pain of cutting public spending till later.

* Comparing the performance of the UK and US economies since 2010, what stands out is the extreme weakness of UK consumer spending. UK consumer spending power was crushed by big tax rises and by surging import prices fuelled by a weak pound. America has not raised taxes and import prices have been relatively subdued. The shale gas boom has also delivered a significant boost to US spending power. US retail gas prices have fallen 40% in the last five years while UK gas prices rose 60% over the same period.

* The question economists are asking now is whether the US – still the world's largest economy – will be able to return to its pre-crisis growth rates of over 3.0% a year.

* On the face of it America's performance last year, with growth of just under 2%, was not promising.

* But given that the euro area was in recession and that the US was undertaking a massive squeeze on public spending this was a pretty good outcome. Goldman Sachs estimates that without the cuts in public spending US growth last year would have been more like 3.3%. America tightened fiscal policy late but it has cut spending aggressively in the last two years.

* This year, economists expect US growth to accelerate to 2.9%, not far off its pre-crisis trend rate, making it the fastest growing economy in the G7 group of major economies.

* The International Monetary Fund believes that America's long term capacity for growth has been undiminished by the global financial crisis. In its latest World Economic Outlook, the IMF forecasts the US will grow by an average of over 3% a year in the five-year period to 2018. This is virtually the same as the forecast rate of growth for Russia – one of the 'BRIC' economies.

* As always, risks remain. America's fiscal deficit remains one of the great imbalances in the world economy and a source of concern to financial markets. Progress has been made and the recovery is working its usual magic by reducing pressure on welfare spending and raising tax receipts. The deal in Congress to suspend the debt ceiling for a year has also assuaged market anxieties. Whether America's political classes can reform the public health and welfare programmes that pose a threat to America's solvency remains to be seen.

* Growing income inequality is another source of risk. In the last 30 years, many middle-income earners have seen little if any growth in their spending power. For a substantial chunk of the US population real incomes have stagnated. This poses a fundamental challenge to the American ideal of opportunity and rising prosperity for all.

* In recent years, numerous writers have made the case that America is a great economic power in long-term decline. Yet what stands out to us is that the US economy has come through the global financial crisis in pretty good shape. That crisis has reduced expectations for long-term growth in Europe but left them unaltered in the US. To paraphrase Mark Twain, "reports of the death of the American economy have been greatly exaggerated".

MARKETS & NEWS

UK's FTSE 100 ended the week up 2.5% following more positive economic data from the US.

Here are some recent news stories that caught our eye as reflecting key economic themes:

KEY THEMES

* US manufacturing activity grew in February at its fastest pace since May 2010

* Martin Weale, external member of the Bank of England's monetary policy committee, suggested interest rates could rise as early as the spring of 2015

* Wage inflation has risen to around 2.5% from 2.0% in the new year according to data from pay research group Incomes Data Services

* Britain's productivity gap against its main developed countries, measured by output per hour, has risen to its widest in 20 years

* Global test rankings show that the children of British professionals significantly lag children of low-paid workers in Shanghai and Singapore

* Nigerian President Goodluck Jonathan suspended the governor of the country's central bank, who had been a vocal critic of the government

* Scientific research has found that periods of market volatility significantly raise levels of stress hormones in traders and suppress risk appetite

* The Japanese trade deficit widened to a record $27.4bn in January, driven by rising import costs following the large depreciation of the Yen

* Boots, the high street chemist, announced that it will start stocking an e-cigarette made by a subsidiary of Imperial Tobacco

* CNBC report that customer satisfaction with Internet shopping fell to its lowest level since 2001 in the US, perhaps due to unrealistically high expectations of service amongst online consumers

* Following criticism from developing countries over the Fed's monetary policy, US Treasury secretary Jack Lew said that "emerging markets need to get their fiscal house in order and put structural reforms in place"

* French outsourcing group Atos Healthcare has said it is seeking an early exit from its £500m government benefits contract, citing persistent threats and abuse against staff

* Business Wire is to stop providing direct feeds of corporate news to high-speed traders, amid concerns that this provides an unfair advantage to traders

* Brazilian finance minister Guido Mantega announced that it would cut $18.5bn in public spending this year, in an effort to win back investor confidence

* The price of a cup of coffee may have to rise following a 50% rise in the price of Arabica coffee beans in the last month

* Almonds have become the target of a number of recent robberies, with a large truck of the nuts now apparently worth well over £100,000 – that's not peanuts!

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