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Wednesday, December 24, 2014

The Simple, Pathetic Reason Why UK Economic Growth Lags America

Yesterday, the UK and the US both reported new numbers for economic growth. In the UK, Q3 GDP was adjusted down to 2.6%. Across the pond, growth was a massive 5%. The pace of growth in America is roughly twice that of Britain, in other words. This is surprising, because the two countries have similar economies and governments with similar fiscal policies. They share the same language (duh) and, frequently, large international companies have sizable numbers of employees in both countries. So why is Britain faring so much worse in the recovery? The answer is jobs and investment. America does much better on both factors: It has stronger public and private investment either coming in, or staying in the country. And it has better, higher paid jobs that are more productive — making those investments pay off. To put that in cartoonish anecdotal terms: America is now a nation of highly paid software developers. The British, meanwhile, are selling pies at Greggs for minimum wage. (Greggs is the archetypal cheap sandwich shop found in every British high street, for those of you reading this outside the UK.) It's tempting to think that the UK's growth problem is due to the fact that it's currently parked in a bad neighbourhood. Britain won't be seeing any positive knock-on effects from economic growth in Greece, Italy or Spain for a while. Russia basically just collapsed and will be in recession for the next two years, economist believe. External demand for our exports is crimped. The US, by contrast, is so big it is its own neighbourhood, so it isn't affected as much by a downturn in Portugal. But this isn't the main difference. Because Britain is doing so much better than its neighbours it ought to attract investment. But as a note to investors from Investec Economics yesterday points out, investment is actually leaving the country on a net basis: The main story was once again the weakness of the balance of investment income, which hit a new record low of  -£12.4bn (minus £12.4bn). Of particular note was that the UK recorded a deficit of £1.7bn on income from direct investment during the quarter, only the second time in 17 years that this has occurred. This represents payback time for the number of years of consistent current account deficits which have resulted in a worsening in the UK’s net international investment position. This is estimated to have been in surplus in mid-1995 but is now reckoned to be in deficit to some £451bn, or 25% of GDP. At the same time, the jobs that are being created in the UK are low-wage jobs (think cafes and pubs and, yes, Greggs). Those types of jobs have a lower return on investment than high-paid, high-skilled jobs (think app developers and drug researchers). Here's the Bank of England's most recent job creation chart. Note that the biggest growth in jobs is in the low-skilled sector: In fact, in the UK, wages aren't even keeping pace with inflation. The general direction of this chart (below) tells you all you need to know, but the phenomenon you should care about is the fact that earnings of all workers in the UK have shrunk to below 90% of what they were in 2008, and that the wages of low and medium-skilled workers have taken the biggest hit of all: In the US, wages have beaten inflation recently (even if only marginally), according to the Bureau of Labor Statistics. The investment picture in the US couldn't look more different. Here were the contributing factors to GDP growth there, according to the US Commerce Department: Personal consumption spending Nonresidential fixed investment Federal, state and local government spending Exports Residential fixed investment Of those factors, three are forms of investment. (Conservatives ought to note that government spending is driving the US economy quite nicely. This crimps their argument that the UK's anaemic growth is the fault of the NHS — both countries have large-spending state sectors.) Now, here is what investment looks like in the UK. It's the light blue section of the column — notice how it basically collapsed in Q3: That's the difference between the US and the UK in terms of growth. Both are growing, but the UK is hobbled by low wages and lousy investment levels. It's tempting to conclude that low wages are reducing investment simply because low-wage jobs are so much less productive than high-wage/high skill jobs. In the US, the investment picture is much rosier: private investment and government spending appears to be boosting the economy at double the pace of the UK.Join the conversation about this story »


READ THE ORIGINAL POST AT uk.businessinsider.com