This perhaps poses the question, will US growth drag the rest of the developed world up with it, or will there be a convergence downward, where the US economy starts to perform as poorly as the rest?
Bell says “consumer spending in the US has been very strong because they didn’t really experience the energy price shock the rest of the developed world did. That has been the entire difference in terms of growth between the US and Europe. And what we are seeing now in the US is that the job market is performing well”.
He says one factor that has acted as a restraint on US economic growth was the nature of that economy – it tends to have far more fixed rate mortgages than Europe. While that may have insulated some consumers from higher rates, it also meant that people were not inclined to move house, as taking out a new mortgage would mean paying the present day, higher interest rates, rather than the lower rate they were able to lock in.
Bell says this has meant the component of economic growth that comes from house-building and house moves was below the normal level. He adds: “But with mortgage rates coming down in the US, just as they are in the UK, there is now less of a penalty for a US consumer to move house, which may boost that market.”
Mai’s view is that the US economy was boosted by fiscal spending that occurred to a far greater extent than in Europe, but as this diminishes it will lead to slower growth in the US.
Bell notes that there is an election in the US in 2024 and expects this will mean that “no policy that is anything like austerity” will happen there, and so fiscal policy will remain supportive of economic growth.
Moëc's view is that while the impact of higher interest rates will lead to a slowdown in the US, it will also see a slowdown in Europe for many of the same reasons, though he expects fiscal policy to be tighter in Europe than in the US, something which would be expected to be negative for growth.
He particularly notes that in Germany, where it was recently revealed that economic growth for the full year 2023 was -0.3 per cent, the supreme court has blocked some budget plans, and contrasted this with the US where he says the Inflation Reduction Act is having a materially positive impact on growth in that country.
Domestic bliss?
Bell is relatively optimistic about the outlook for the UK economy, he expects inflation to continue to fall as sterling was stronger in 2023 than in 2022, and as the effects of this feeds through to the wider economy it should lead to a decline in the cost of imported goods.
