The United States economy has once again outperformed consensus forecasts, posting stronger-than-expected growth in the third quarter. Gross domestic product expanded at an annualised rate of 3.2 percent, driven by resilient consumer spending and robust corporate investment. Yet across the Atlantic, the UK Treasury has issued a cautionary note: the same dynamism that propels American growth carries the risk of overheating, with implications for global financial stability.
Figures released by the Bureau of Economic Analysis show the US economy growing at its fastest pace in three quarters. Labour markets remain tight, with unemployment holding at 3.8 percent. The Federal Reserve, which has already raised interest rates to their highest level in 15 years, now faces renewed pressure to tighten further. Markets are pricing in a 70 percent probability of a quarter-point rate hike at the next meeting.
In London, the Treasury's assessment, contained in an internal briefing paper, warns that the Fed's continued tightening could trigger a sharp correction in risk assets. It also notes that the strength of the dollar, a consequence of higher US rates, is exacerbating inflationary pressures in emerging markets. For the UK, the risks are more immediate: the Bank of England has already raised rates at 14 consecutive meetings, and the Treasury fears that further monetary tightening could choke off the fragile recovery now under way in Britain.
The contrasting trajectories of the two economies were laid bare in the data. US consumer spending, the main engine of growth, rose 0.8 percent in October. In the UK, retail sales fell 0.3 percent in the same period. Business investment in the US grew at an annualised rate of 5.4 percent. In the UK, capital expenditure contracted for the second quarter in a row.
The Treasury's warning, though couched in diplomatic language, is unusually direct. It says that the US economy is now operating "beyond its sustainable capacity" and that "the risk of a hard landing has increased materially". It also notes that the fiscal stimulus provided by the Biden administration, while supporting growth, has added to demand pressures.
The response from Washington has been dismissive. Treasury Secretary Janet Yellen told reporters that the US economy is "in excellent shape" and that there is "no evidence of overheating". The International Monetary Fund, in its latest World Economic Outlook, forecasts US growth of 2.3 percent in 2024, well above potential. But the fund also notes that "risks are tilted to the downside" and that "the policy mix in the US is a source of uncertainty for the global outlook".
For European policymakers, the US-UK tension is a familiar one. The continent has long been wary of American economic supremacy and its capacity to export instability. The Treasury's warning is a reminder that the post-crisis consensus on macroeconomic policy is fraying. The era of dovish central banking and fiscal discipline has given way to one of aggressive tightening and large deficits. Whether this new paradigm is sustainable is the question that now preoccupies finance ministries from London to Berlin to Tokyo.
