Bank of Canada Governor Mark Carney said April 18 that America “is breaking out” of the pack of crisis economies, and U.S. Treasury Secretary Jacob J. Lew said May 7 that growth may accelerate to a rate of 3-plus percent by early next year.
While the U.S. is repeating a pattern of the past three years in suffering a soft patch now, Aneta Markowska, chief U.S. economist in New York at Societe Generale SA, predicts it soon will start expanding at an average 3.5 percent pace. This will continue during the next five years, eclipsing long-run trend growth of about 2.5 percent, she added.
Consumers, whose spending represents 70 percent of the economy, have come through five years of deleveraging, and the prices of homes will rise 30 percent in the next five years, Markowska said, citing fiscal tightening as the only outstanding drag. Employers took on an additional 165,000 workers in April, more than forecast.
To be sure, the U.S. isn’t firing on all cylinders. GDP grew an annualized 1.6 percent in the second quarter after advancing 2.5 percent in the prior three months, as federal spending cuts and tax increases hit, according to the median estimate of economists surveyed by Bloomberg News. Recent reports showed auto sales and manufacturing cooled in April, while unemployment is still a percentage point above the 6.5 percent rate to which the Fed has tied its stimulus.
“We’re moving through a phase of pretty intense fiscal tightening,” said JPMorgan’s Hensley.
Still, Europe’s woes are greater more than three years after its sovereign-debt crisis began and as Cyprus became the fifth nation to negotiate a rescue. A recession that started in the final quarter of 2011 now will extend through the third quarter of this year, according to a Bloomberg survey of economists.
The jobless rate reached a record 12.1 percent in March, manufacturing and services contracted for a 15th month in April and inflation weakened to the slowest since 2010. The pain has spread from the periphery -- with France struggling to avoid a third recession in four years -- although data have improved recently in Germany.
“The economy is basically not going anywhere at all,” said Marchel Alexandrovich, senior European economist at Jefferies International Ltd. in London.
The divergent performance of the U.S. and euro area also may reflect different monetary strategies. The Fed cut its benchmark rate to a record near-zero low in December 2008 and has held it there ever since. It’s conducted three rounds of quantitative easing, boosting its balance sheet to $3.3 trillion.
The ECB has been more conservative. It often has throttled back its monetary expansion, and its 2.6 trillion-euro balance sheet is 16 percent below the peak of last June. It raised its benchmark in 2008 and 2011, cutting it to a record low of 0.5 percent only this month, more than four years after the Fed’s action. Complicating its task: Strained banks in the periphery have resisted passing on the cheaper borrowing costs.
European governments, under the whip hand of Germany, also embarked on austerity in an effort to regain fiscal control. The euro-area’s average budget deficit will fall to 2.9 percent of GDP this year from 6.4 percent in 2009, according to the European Commission.
In the U.S., President Barack Obama resisted Republican efforts to tighten the budget, arguing the economy wasn’t strong enough to take the hit. The resulting stand-offs, especially over a debt-ceiling increase in 2011, disrupted financial markets while putting off the brunt of the budget squeeze until this year, when the economy is better able to withstand it.
European authorities may be shifting, signaled by the ECB’s rate cut this month and President Mario Draghi saying it’s “ready to act again.” Officials also are studying how to revive credit markets by using collateralized loans.
The ardor for austerity also is fading. Countries are being given more time to satisfy the euro’s budget limits, and voters in nations including Italy are backing parties willing to reconsider cost-cutting.
Even so, Europe will remain the laggard. American growth will accelerate to 2.8 percent in 2014 and 3.2 percent in 2015 from 1.8 percent this year, said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts. He projects euro-area GDP will rise 0.4 percent next year and 1.2 percent in 2015, after contracting by 0.7 percent in 2013.
“The U.S. has a lot of things going for it: better policies, quicker adjustment,” Behravesh said. It’s “in much better shape than the European economy.”