View from Across the Pond
By Sam Beres
London – My semester of study in London made me realize that the United Kingdom has taken a backseat to the U.S. and the euro zone. The focus is rightly on the U.S. and the 17-country region using the euro as a common currency. They have greater impact on the global financial markets. But there are lessons to be learned from the current U.K. situation.
Sam Beres, a 2011 summer intern at Landaas & Company, recently completed a semester studying in England, where also he had an internship at a major investment company.
Based on the data, the U.S. has proved more proficient at handling the global financial crisis and the ensuing recession. The U.S. addressed the downturn with fiscal and monetary policies that dampened the crisis and kept the recession somewhat in check.
The U.S. gross domestic product continues to show slow, yet sustainable growth while a recent U.K. GDP report announced a double-dip recession for the first time since 1975. Two main reasons for the U.K.’s double dip:
- increased uncertainty in the euro zone
- lack of personal consumption expenditures combined with heavy government austerity.
Euro zone Woes
Euro zone GDP contracted by 0.3% in the first quarter and consumer confidence slumped. Unemployment reached 10.9% in March – the 11th consecutive monthly increase and the highest since the 1999 introduction of the single currency.
The U.S. is one of the heaviest investors in Europe, so the crisis is definitely disconcerting, but take a moment to think of the implications a declining euro zone has for the U.K. Geographical proximity makes the euro zone a main customer for U.K. goods and services.
The zone’s large impact on the U.K. economy means that nearly every front-page headline of every morning and afternoon newspaper I see is about the euro zone. Facing public pressure, the Bank of England is expected to make a decision about an additional round of quantitative easing, fanning fears of prices going even higher than the current 3.5% inflation rate, which is well above the Bank of England target of 2%. This only goes to show the important timing of the Federal Reserve’s first two rounds of quantitative easing for the U.S. recovery.
Personal Consumption, Government Austerity
Consumer spending generally leads GDP growth in a healthy economy. Governments often pick up the slack when consumer spending decreases in tough times. We saw that in the U.S. during the financial crisis. And though the U.K. and other countries were no different at the time, the situation has changed.
U.S. consumers are now leading the expansion of the GDP, while personal consumption in the U.K. continues to lag and lack stability. At the same time, the U.K. government is implementing large austerity measures aimed at controlling the deficit. On the one hand, headlines reflect public worry over the euro zone, but I also see citizens protesting in Trafalgar Square over the government’s fiscal irresponsibility.
In the end, what does the U.K. public desire more – a growing economy or decreased government budget? They may not both be possible in the current situation.
As for the U.S., I want to see the budget deficit cut and under control. As a young American entering the workforce next year, I and my generation will likely shoulder a large part of the deficit-cutting process through reduced programs and higher taxes.
There is a point, though, where fiscal conservatism can impact the drive for renewed growth. The U.S. is in a much better place than the U.K. economically, but at what point could austerity in the U.S. impact our slowly growing economy?
Why Should U.S. Investors Care?
I am not going to make any bold predictions about whether a stubborn euro zone will have a larger drag on U.S. markets or whether U.S. deficit cuts will put pressure on GDP growth. As Bob Landaas always says, corporate earnings and interest rates drive the market, and right now they show no reason to worry.
I suggest that U.S. investors keep a keen eye on the situation in the U.K. The U.S. was the world’s guinea pig as countries attempted to recover after the financial crisis. Now the U.K. is the guinea pig, as it experiences greater effects from the euro zone and attempts more drastic measures to balance the budget.
The situations between the two countries may not perfectly align, but the U.S. has something to learn from the outcomes of U.K. policies as the euro zone crisis carries on and the U.S. deals with its own deficit in the near future.
Sam Beres is a former intern at Landaas & Company and a finance major at the University of Notre Dame, where he plans to graduate in 2013.
initially posted May 4, 2012