The American economy has once again shrugged off dire predictions, posting stronger-than-expected growth figures that have left the forecasting community red-faced. Yet beneath the headlines, a quieter story is emerging: the British economy is proving remarkably resilient, even as global markets lurch with every turn of the central bank screw. As a veteran observer of the City of London, I find the contrast instructive. The US boom is a sugar rush fuelled by fiscal incontinence and a labour market that refuses to cool; the UK's steadier performance is rooted in a more cautious approach to public spending and a currency that acts as a shock absorber.
Let us start with the numbers. US GDP grew at an annualised rate of 3.1% in the third quarter, comfortably above expectations. The consumer, armed with pandemic-era savings and generous wage hikes, continues to spend. But this is not the virtuous cycle the White House claims. It is a narrative of government borrowing on a scale that would make a Victorian chancellor faint. The federal deficit is running at 6% of GDP, a figure normally associated with war or deep recession. This is what I call the Keynesian hangover: the party is great, but the morning after, you find yourself nursing a nasty case of inflation.
American inflation, while down from its 2022 peak, remains stubbornly above the Federal Reserve's 2% target. Core PCE, the Fed's preferred measure, was 3.7% last month, and services inflation is proving sticky. The market now expects rates to stay higher for longer, pricing in only two quarter-point cuts next year. This has sent the 10-year Treasury yield above 5% for the first time since 2007, a level that usually signals distress. The US housing market has frozen; mortgage applications are at a 28-year low. The average 30-year fixed rate is near 8%. This is a pin slowly pressing into the balloon.
Meanwhile, across the Atlantic, the UK economy is delivering a masterclass in British understatement. Third-quarter GDP came in at 0.5% quarter-on-quarter, down from the US but hardly a recession. The labour market remains tight, with unemployment at 4.2% and average earnings growth of 7.7%. More importantly, inflation is tumbling. The September CPI figure came in at 6.7%, a whisker and a half, but the trend is downward. The Bank of England has held rates at 5.25% for two meetings, and markets see a cut by mid-2024. The key difference is fiscal discipline. Chancellor Hunt has resisted the temptation to splash cash, sticking to his Autumn Statement plan of gradual fiscal consolidation. The result is a gilt market that, while volatile, is not flashing red.
Let me be clear: the UK is not immune to the global tightening cycle. The housing market is soft, and business investment is lackluster. But the currency is providing a buffer. Sterling has fallen nearly 5% against the dollar this year, which helps exports and boosts the earnings of FTSE 100 multinationals. It also means the UK is importing less inflation, as energy costs fall in dollar terms. Compare this with the euro area, which is teetering on the edge of recession, or Japan, where the yen's collapse is forcing the Bank of Japan to intervene.
The real test will come if the US manages to avoid a so-called hard landing. If the American consumer keeps spending and inflation stays high, the Fed will keep rates elevated. That could suck capital out of emerging markets and even advanced economies, including the UK. Gilt yields have already risen in sympathy with Treasuries, and the UK's large current account deficit makes it vulnerable to capital flight. But I would argue that the UK's fundamentals are sounder. The financial sector is well-capitalised. The banking system is not exposed to the commercial real estate carnage in the US. And the government has not pledged trillions in green subsidies like the Inflation Reduction Act, which is adding to US debt dynamics.
In the end, markets reward patience and punish hubris. The US economy's defiance is impressive, but it rests on shaky foundations. The British model, boring and unassuming, might just outlast the American carnival. As I tell my younger colleagues, the tortoise always wins when the hare stops for a nap. Watch the bond markets, not the headlines. They tell the real story.
