The latest figures from across the Atlantic have left economists on both sides of the pond scratching their heads. The US economy, against a backdrop of sky-high interest rates and lingering inflation, continues to motor ahead. Third-quarter GDP growth came in at an annualised 4.9%, confounding the doomsayers who had predicted a recession. This resilience, however, raises uncomfortable questions for the UK, where the Treasury is conducting a review of fiscal resilience in the face of a stagnant economy and a debt-to-GDP ratio that is making gilt investors jittery.
It is a classic tale of divergent fortunes. The US consumer, armed with pandemic-era savings and a robust labour market, is still spending. Corporate America is reporting profits that would make a FTSE 100 CEO weep with envy. Meanwhile, in the UK, the consumer is squeezed by the highest tax burden since the Second World War and mortgage rates that are punishing those who rolled off fixed-term deals. The Chancellor, Jeremy Hunt, is left to soothe nervous markets while trying to patch the holes in a fiscal ship that leaks from every seam.
The root of the difference lies in structural factors. The US economy is a beast built for vigour; with a flexible labour market, vast energy independence, and a tech sector that innovates like no other. The UK, by contrast, is shackled to a creaking planning system, a reliance on imported energy, and a workforce that has all but downed tools. Labour productivity in the UK has been stagnant for over a decade. This is not a coincidence.
What does this mean for the UK Treasury's fiscal resilience examination? It means they are looking in the mirror and not liking what they see. The core problem is that the UK’s gilt yields have been rising, tracking the US Treasury yields but with a risk premium that reflects the market's concern over UK fiscal credibility. When the US sneezes, the UK catches a cold, but when the US economy booms, the UK barely sees a temperature rise.
The government's response has been to promise fiscal discipline. In the upcoming Autumn Statement, Hunt is expected to announce tax rises and spending cuts to fill a £50 billion black hole. But this is a double-edged sword. Austerity risks choking off what little growth remains, trapping the UK in a low-growth, high-tax equilibrium. The alternative, borrowing more to stimulate the economy, risks a bond market revolt reminiscent of the Truss era.
Investors are watching the currency markets. The pound has been volatile, and any hint of fiscal incontinence will see capital flight accelerate. The US dollar, buoyed by higher yields and safe-haven status, remains the dominant force. For the UK, this means higher import prices and pressure on the Bank of England to keep rates high, even as the economy falters.
In the end, the US economy's defiance is not a cause for celebration in the UK. It serves as a stark reminder of the gulf in economic dynamism. The Treasury's examination of fiscal resilience is a necessary exercise, but it won't solve the underlying malaise. Without the reforms needed to boost productivity, the UK will remain a slow-growth economy, forever adjusting to the US's thermostat.
