Within the global economy, the United States has emerged as a provider of stability, even if the growth of its economy has remained sluggish.
Usually, the recoveries that follow recessions are much stronger. We therefore expect the U.S. economy to revert to a path of robust growth of around 3% on average.
The current post-recession recovery has been moderate and has seen neither a quickening pace of activity nor a convergence toward a higher growth trajectory due to the nature of the shock.
A financial crisis like the one seen in the United States from 2007 always takes a long time to unwind. As such, it cannot be compared to a recession triggered by a raw materials shock, because it alters the behavior of economic agents for a long time. Accumulated private debt must be wound down. This takes time and requires the reallocation of resources. It lengthens the time it takes for a recovery to unfold.
In this environment of moderate recovery after a financial crisis, the federal government has therefore played a major role in its attempt to compensate for the change in behavior of private players, in particular consumers. In response to the 2008 shock, it let the public deficit rise, which led to a dramatic increase in public debt.
This trade-off has not been challenged since 2008. It is reflected in the budget deficit for the fiscal year from October 2011 to September 2012, which stands at -7% of GDP, as well as the ratio of public debt to GDP, which is close to 100% (102% at end-June 2012).
Two obstacles hinder a quick recovery
● The length of the adjustment to a financial crisis implies moderate growth, as the usual instruments of economic policy cannot bring the economy back on a more robust path, before a more vigorous activity and employment dynamic can set in. The very accommodative federal fiscal policy failed to create the lifesaving counterweight.
● Household debt is contracting and corporate debt is stabilizing, but government debt is growing rapidly.
The increase in government debt represents a pooling of risks assumed in the past. The government agrees to take on debt so that other economic agents can deleverage and its intervention makes it possible to modify risk profiles. This should enable households gradually to regain some leeway and the trend will be all the more noticeable as the health of the real estate market, the main counterparty of their debt, improves.
Via its unconventional policies, the U.S. central bank also takes on the debt and issues liquidity in exchange.
This helps to ‘smooth’ the debt over time so that it weighs on the present as little as possible, but its absorption will take time.
Initial signs of an improvement?
Some adjustments seem to have been completed, e.g. in the real estate market. Since late 2006, this market was indeed in deep trouble and burdened households, as homes are their main asset. They had high financial commitments and the value of the counterpart of the debt was falling.
But the real estate crisis is fading: home building had declined so much that the stock of available homes dropped while the population continued growing, which means that construction must resume. Household wealth should therefore increase, which will ultimately have a positive impact on household consumption, and this should in turn give companies an incentive to increase capital expenditure.
Businesses had cut back capex since last spring due to the deterioration of the international environment. And if the domestic dynamic gathers momentum in the United States via consumption and the real estate market, this could prompt businesses to spend again to strengthen the expansion.
New options for a redefined growth model
New options that are more structural emerging in the U.S. economy. A recurring theme in the United States has been ‘re-industrialization’, with a focus on lowering energy costs by using shale gas. This very cheap source of energy is restoring the competitiveness of several segments of U.S. industry, since in this sector this cost is a critical component of growth. Companies should therefore focus on internal growth, which will ultimately create jobs.
The United States is thus using a slightly different growth model to regain a degree of autonomy without calling globalization into question. To generate robust and durable growth, a country must indeed be able to be independent in its choices. This is the path that the U.S. has chosen, even if it may prove to be a source of problems in the medium term from an environmental point of view.
The U.S. economy is taking time to adjust to a new environment although it could have adopted a more sustained pace to recover more rapidly. The U.S. has chosen to embark on an admittedly lengthy, but smooth, recovery process, which has allowed it to establish a more autonomous growth model.
It is now up to Europe to find its own growth path to create a more satisfactory employment dynamic.
Drafted on 18 Oct. 2012