Since the great recession, America’s economic recovery has been significantly stronger than our own. The British left hypocritically overlooks the fact that the benefits of US growth are grotesquely skewed towards the rich, but the question remains – why is UK growth noticeably weaker?
Adam Posen, a member of the Bank of England’s Monetary Policy Committee, runs through some of the obvious answers – America’s ability to delay fiscal retrenchment, differences in exposure to the Eurozone and the impact of inflationary shocks on the UK economy.
However, he expects most of these divergent factors to recede:
- “Inflation is only a temporary difference, and the national rates are now converging on their long-run targets. On official forecasts, fiscal policy is likely to remain more contractionary in the UK than the US for a couple of years to come, but the difference will shrink significantly from both ends over the next couple of years.”
However, he does identify one key structural weakness that has hampered the British economy – and which, if unresolved, will continue to do so:
- “A longer-term troubling difference is in the apparent relative inefficiency of the British domestic finance system in allocating capital to businesses. While some of that should recede when the banks build up their capital buffers, and if and when euro area risks themselves recede, there remains a clear structural agenda for the UK to deal with in its financial system.”
And the cause of this relative inefficiency?
- “…lack of competition in the UK banking system compared to the US, and the smaller proportion of non-financial businesses which have access to loans, bonds, and/or securitization thereof in the UK than in the US.”
Lack of competition. It’s funny how supposedly leftwing concerns – like reform of the banking system – often have rightwing solutions.