Thursday, October 4, 2007

Problems of US style Consumer led Economic Growth

Should we be concerned about Consumer / Service Sector led Growth?

In the past 10 years the UK and US economy has experienced strong economic growth, but, the main determinant of economic growth has been from consumer spending rather than increased manufacturing output. It has been suggested that economic growth is unbalanced. Furthermore, both the UK and US economies have relied on a booming housing market to finance consumer spending. The results has been a fall in the savings ratio, a rise in debt and growing current account deficits. What the are the effects of relying on consumer led growth? Should governments do more to boost balanced growth?

Problems of Consumer Led Growth

Balance of Payments deficit.

As a result of consumer led growth, the US has experienced a large deficit on the current account. This is because the imports of goods and services is greater than the exports of goods. The US current account deficit has approached 7% of GDP and is a significant problem and reflection of the unbalanced nature of growth.


The devaluation in the dollar is partly related to this high level of consumer spending and current account deficit. Because American consumers are spending more on imports the supply of dollars is greater than the demand from other countries. With a net outflow of money, this causes a devaluation of the dollar. (There are other reasons behind the devaluation but, this is one factor)

Growth Dependent on Housing Market.

One reason why US consumer spending has been so strong is that it has been buoyed by rising house prices. Rising house prices have enabled people to remortgage; it has also increased consumer confidence. Therefore, the housing market has played a key role in the economic growth of the US and UK. However, now that the US housing market is in decline, it means that many people who took out risky mortgages are now in danger of defaulting. It is also causing a marked slowdown in growth.

However: There are also reasons not to be concerned about Economic Growth

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