US lessons for the UK economy

US GDP figures out yesterday shed some new light on the outlook for the UK economy.

Fourth quarter DGP growth was 3.2% annualised (or roughly 0.8% in Q4, compared with 0.7% in the UK). Consumer spending accounted for 2.3 percentage points of that, business investment 0.9, with half that from an inventory build up, and net trade 1.3. Add it all up and growth would have been over 4.0% annualised (or over 1% on the quarter).

Two stories stick out.

First, Government spending knocked a full 1 percentage point off that top line number (providing a rough balance that would make most politicians and economists in the UK very happy).

Second, business investment has yet to pick up despite rising profitability. As Robin Harding from the FT states:

Most forecasts for strong growth in 2014 – and all hopes for sustainable growth – rest on a pick-up in business investment. Despite record high corporate profits as a share of gross domestic product, investment has recovered at a much slower pace than after previous recessions.

…the overall picture is still that companies are content to sweat their existing assets rather than invest strongly in future growth.

So while manufacturing profitability is currently running 25% below the pre-recession trend, even a rebound in profits may not automatically translate into a pick-up in business investment.