Saturday, March 14, 2009

Consumption imbalances

The graphic below captures the household consumption as a share of GDP for US, UK, Frace, Germany, Japan etc, a ratio that we expect to be fairly constant for a country with stable growth rates. But the graphic reveals that US, and to a much smaller extent the UK, have seen consumption increasing at rates much faster than GDP for the last two decades, with the US ratio touching a peak of 72% in 2007.

Antonio Fastas proposes the following reasons for the sharp rises in the shares of household consumption US and UK
1. Lower taxes (current or future) that increase disposable income
2. Expectations of larger future income (through faster productivity growth)
3. Expectations of more productive investment which reduces the need to save and invest to generate the same amount of future income
4. A demographic transition that makes the future (income or wealth) look "better" than the present

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