LONDON (MNI) – Despite the more sluggish UK recovery compared to
the United States, there is hope that both economies are “on the cusp”
of a stronger recovery, Adam Posen, Bank of England Monetary Policy
Committee member, said Tuesday.

The differing recovery rates are largely due to temporary factors
that will recede and see the UK gain ground on the U.S. economy, Posen
said in a speech prepared for delivery to the National Institute of
Economic and Social Research.

Posen noted that the U.S. economy has seen “significantly more GDP
growth with somewhat lower inflation over the last thirty-two months
than in the UK,” despite suffering “largely the same type and size of
shock at roughly the same time, and our respective central banks have
pursued roughly the same type and size of counter-cyclical policy
response.

Nonetheless, “I am hopeful that we are on the cusp of a more robust
recovery in both economies — in the absence of premature policy
tightening – and though the UK will take some time to catch up with the
US, it largely will.”

The causes for the differing growth rates include the
“significantly less net withdrawal of fiscal stimulus in the US than
UK,” Posen said, and the UK raised the value-added tax while the
sterling depreciated more rapidly than the U.S. dollar.

In addition, there was better recovery of U.S. corporate investment
due partly to the smaller spillover from the eurozone crisis, and
household consumption rebounded much more in the United States in part
because of the larger increase in UK energy costs.

But, “The vast majority of these factors are temporary or cyclical
in nature, with the exception of the structural failures of the UK
financial system for domestic credit, whose importance I have long
stressed,” Posen said.

“Going forward, most of these factors causing the difference
between UK and US behaviour will recede.”

But there remains a problem in the UK financial system, he said.

“Credit was more poorly allocated in the UK, producing less
investment for a given pound of credit or financing issued. The
spillovers of risk from the euro area on the UK financial system,
inherently much less of a problem for the US financial system, also
distorted the cost of capital and risk taking behaviour.”

He said, “there remains a clear structural agenda for the UK to
deal with in its financial system.”

** MNI London Bureau **

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