Rebalancing global imbalances: that is what major economists have always considered crucial for the international economy to make a lasting exit from the crisis that began in 2007 and became even more severe following the Lehman Brothers bankruptcy in September 2008. An economic growth still based exclusively on US consumption, which is driven by a booming real estate sector and buoyant credit markets, with other leading international economies (Germany, China, and emerging countries) benefiting from exports, is no longer sustainable. Several months after the outbreak of the crisis - the US officially entered into recession in December 2007 - it is essential to check whether these imbalances, over-indebtedness in the US in particular, have been healed to see if the long-awaited recovery of which we glimpse the first signs can be considered robust and lasting, or if it might be only of a temporary nature given the massive fiscal and monetary stimulus enacted at the international level. The signals coming from the United States, Europe and China are hardly encouraging. Most of the imbalances that have plunged the world economy into crisis are still far from being resolved and new sources of concern are already surfacing.
First, US consumer confidence data do not give grounds for optimism about the country’s medium-term economic growth prospects, albeit showing that US consumers are on track to correct the excesses of the past. Indeed, the recent decline in consumer spending in absolute terms (-1.7% in Q1 2009 vs. the high hit in Q2 2008) may point to a further moderation in household consumption growth going forward. However, the share of personal spending as a percentage of GDP is still well above the 70% threshold and firmly above the average for 1947 / 2001 (the year in which it broke through the 70% mark for the first time ever), when it stood at 65%, thus suggesting that a decrease in the weight of personal consumption on the US has yet to materialise and may adversely affect growth in the medium term.
Second, the drop in total household debt from 13,900bn in Q3 2008 to 13,794bn in Q1 2009 is a first promising sign for the household deleveraging process in the US, which is still far from complete due to the massive debt pile built in recent years. Household debt, in fact, is still too high as a percentage both of GDP (97%) and of personal wealth (22%), which fell by more than 16% in the face of a deteriorating housing market and bearish equity market trend. Therefore, household leverage is higher than in the months immediately preceding the ongoing financial crisis. Household net worth dropped from the peak of 645% of disposable income achieved in 2006 to 467% in the first quarter of this year. Under this scenario and given the bad health of the labour market (the unemployment rate is expected to exceed 10% in coming months) the recent increase in the savings rate has come as no surprise. The May figure showed that the savings rate jumped to 6.9%, reflecting households’ willingness to preserve the increase in disposable income stemming from higher social transfers and despite lower wages. Hence, personal spending growth is likely to remain sluggish for several quarters.
Households’ more conservative approach to personal spending has also curtailed the current account deficit, which has been another cause for concern for the US economy, the dollar in particular, in recent years. Indeed, after peaking at 5.8 of GDP in 2006, the trade deficit narrowed to 4.9% of GDP in 2008 and could fall to 2.9 of GDP in 2009 should the first-quarter trend be confirmed.
However other variables suggest that over-indebtedness in the US (based on the Federal Reserve’s latest data the total debt of the household, corporate and public sectors soared from 138% of GDP in 1974 to 243% in 2008) may continue to weigh on the US economy for many years, constraining the growth potential. First US corporates’ debt grew further in Q1 both as a percentage of GDP (79%) and as a percentage of their assets (71.7%) .As things stand, corporate investments are likely to remain very weak for some time also in the face of a slowing consumption, and only a sharp upturn in exports might give them a boost.
But it is the robust increase in public sector debt (though almost universally considered necessary to sustain economic growth in coming years) that shows that US growth will likely continue to depend on an increase in total debt in coming years. The Congressional Budget Office’s estimates see a doubling of the federal debt over the next five years, with the share of private debt due to rise from 40.8% of GDP in 2008 to 71.3% in 2013 and 81.7% in 2019. With a total debt / GDP ratio of 243% in 2008, maintaining this same ratio would require a household and corporate debt reduction of about 15% in the five years ahead. Otherwise within five years the US debt level would even be higher than that which sparked the crisis in 2008. A possible second round of fiscal stimulus, which has been hypothesised by President Obama’s economic adviser Laura Tyson during the week, is clear evidence of the risk of a further deterioration in public accounts.