EconoMonitor

The Wilder View

UK vs. US in graphs

The U.S. and U.K. economies are in hot (no boiling) water. Some call it the brink of a debt disaster:

The United States and the United Kingdom stand on the brink of the largest debt crisis in history.

While both governments experiment with quantitative easing, bad banks to absorb non-performing loans, and state guarantees to restart bank lending, the only real way out is some combination of widespread corporate default, debt write-downs and inflation to reduce the burden of debt to more manageable levels. Everything else is window-dressing.” Although the feedback loop cannot be discounted, the real problem here is the tidal wave-sized recession that the financial crisis has brought upon the two economies. The U.K. posted a 1.5% contraction in the fourth quarter (about 6% negative growth, annualized) ,while the U.S. is expected to post an equally dismal 5.5% decline in economic activity.

growth_chart.png

Ex post, it is easy to identify the six errors that led to the financial crisis (hat tip, Mark Thoma). And here is Dr. Doom (a.k.a., Nouriel Roubini) saying that “the U.K. looks more like the U.S. (rather than Iceland): an economy of excesses, but where the solvent government has the fiscal resources over time to fix the system and bailout the financial institutions”. One thing is for sure: the housing boom in the U.S. and in the U.K. ended with a bang, rather than a fizzle:

The housing boom was big in the U.K….

uk_pricerent_chart.png …And even bigger in the U.S. (as measured by the Case-Shiller index)

us_pricerent_chart.png

The charts list the price-rent ratios in the U.S. and the U.K., through the third quarter in the U.S. and December in the U.K. The price-rent ratio is indexed to 2004, and the CPI housing component is used to measure rent, and is used to determine whether home-ownership is overvalued or undervalued. It is obvious that both housing markets were (and still are) overvalued. The peak of the U.S. bubble – 1.2 – saw a 20% appreciation in home values relative to rents from in just two years (2004-2006) – that is a nice bubble!

At this point, the outlook in for both economies is rather dismal. It probably won’t start “feeling better” until the latter part of this year – and that is far from guaranteed.


Originally published at the News N Economics blog and reproduced here with the author’s permission.

4 Responses to “UK vs. US in graphs”

SheldonJanuary 25th, 2009 at 1:09 pm

It is not easy to disagree with Nouriel Roubini, given his track record, but I do when he maintains that the U.S. and U.K. governments are solvent “over time.” With their respective deficits as a ratio to GDP rising alarmingly, and national debts exploding as the cost of stimulus policies and financial system bailouts explodes, time is not on their side, in my view.Sincerely,Sheldon Filgerhttp://www.GlobalEconomicCrisis.com

SheldonJanuary 25th, 2009 at 1:09 pm

It is not easy to disagree with Nouriel Roubini, given his track record, but I do when he maintains that the U.S. and U.K. governments are solvent “over time.” With their respective deficits as a ratio to GDP rising alarmingly, and national debts exploding as the cost of stimulus policies and financial system bailouts explodes, time is not on their side, in my view.Sincerely,Sheldon Filgerhttp://www.GlobalEconomicCrisis.com

GuestJanuary 30th, 2009 at 9:44 am

Oops. If your UK chart had covered a comparable time period the comparison would have shown that the UK’s housing bubble was in fact larger than the US’s.

AnonymousFebruary 1st, 2009 at 1:52 pm

That’s right. An obvious error that should not have happened if you are directly comparing something… I can say from experience that the housing bubble is far worse in the UK than the US. They should really show housing affordability measures which would really highlight the problems with the UK market.At least in the US a middle class person can buy a home. In London it is out of reach for all but the highest earners. But now with all the banks slashing staff and major cutbacks in bonuses the crazy house inflation of the past is long gone.What is needed is years of house price falls to come back to the fundalmentals!

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