A couple of months back, John Taylor made the point that the U.S. recovery is being led by the private sector. The vaunted $787 billion fiscal stimulus package passed by Congress has played no role. This is for a simple reason: it hasn't happened yet. This led Taylor, rightly, to wonder what will happen when it does come on stream, most likely in the middle of the recovery.
Now that the 2009 Q4 figures are available, it is interesting to ask the same question of the UK economy. Recovery has started, or at least the decline has stopped. Where is the improvement coming from? Is it coming from private demand or public spending? Is it coming from home or abroad?
The chart shows the changes in the main components of GDP, in real terms, since 2008 Q1:
Source: ONS. G is general government consumption, NX is net exports, DInvent is the change in inventories, C is household consumption, and GFCF is gross fixed capital formation. Omitted are final consumption not by households, and net acquisitions of valuables.
The main picture is clear. Domestic private demand has collapsed. Until recently our economy was being held up partly by government consumption -- and even more so by foreign demand. (You might be surprised by that, given recent doom and gloom about the UK balance of trade. And there is a downside, which we'll come to.) The fact is that, from mid-2008 to mid-2009, the biggest support for the UK economy came from net exports.