Britain lags in growth race as US emerges from slump

Obama's formula seems to be working as signs of a turnaround appear
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The Independent Online

The American economy seems set officially to emerge from recession this week. Having contracted each quarter since last summer, making it the longest downturn in post-war US history, economists expect a fairly robust expansion to be recorded in the three months to the end of September.

A poll by the Bloomberg news agency of 65 leading economists suggests that the world's largest economy grew at a annualised rate of 3.2 percent over the period, or 0.8 per cent on the previous quarter, a remarkable bounce-back. If it transpires, it will be in sharp contrast to the UK's further contraction at the same time of 0.4 per cent. Indeed, with France, Germany and Japan already out of recession, the signs are that Britain will be languishing at the foot of the international growth league for at least the rest of this year.

More major US-based transnationals will report results next week, with famous name s including US Steel, General Dynamics, Goodyear, Burger King, Colgate-Palmolive, Eastman Kodak , Exxon Mobil, Kellogg and Procter & Gamble publishing their latest figures. Traders and analysts will be sifting the numbers to see if they too justify their current mini-bull run in equities.

There is growing evidence that the Obama administration's $787bn fiscal stimulus programme, the Federal Reserve's policy of quantitative easing and injecting money directly into the economy, and the banking bailout may have been sufficient to push the US economy into positive territory.

In particular, the "cash for clunkers" car-scrappage scheme and tax credits for first-time homebuyers seem to have rescued the beleaguered automotive and real estate sectors. There are also reports that inventory levels are starting to rise again; their collapse was one reason why, in the US and elsewhere, the economy as a whole "fell off a cliff" last winter because declines in stock levels are usually magnified in industrial production rests. Recovery in stocks is regarded as a necessary ingredient for a wider recovery. The weak dollar – troubled also by lingering doubts about its future as reserve currency – is also helping to narrow America's yawning trade deficit with the rest of the world.

The wave of optimism prompted by the recovery in stocks may also help consumer confidence through what economists call "wealth effects"; with people feeling wealthier they should be more confident about spending more. Americans generally have more directly invested in stocks than Europeans.

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But even if the US does stage a recovery built on unprecedented action by the Treasury and the Fed – the overall US budget deficit swelled to an historic $1.4trillion in the last fiscal year – there are doubts even in the White House about how strong the momentum will prove to be as we approach 2010.

Christina Romer, who chairs President Obama's council of economic advisers, said the fiscal stimulus package agreed in the spring had already done much o f its work, and the remaining tranches of spending would merely prevent the economy from suffering a relapse. "By mid-2010, fiscal stimulus will likely be contributing little to further growth," Ms Romer said.

She added that the federal government had already expended $194bn of the total stimulus package, most of it in tax cuts, aid to states and unemployment and food stamps, and a further $146bn had been earmarked.

She said the package had saved or created between 600,000 and 1.5 million jobs but predicted that unemployment would remain at about 10 per cent. Mr Romer added: "This is not a normal recovery. Coming out of this, we've got lots of things working against us."