Economic recovery in the United States came from internal private demand. Deleveraging was key for households but they continue to consume. Companies have increased their investments. Each was able to adjust its behavior and dynamic in a changing framework. US government has helped these adjustments by allowing a large budget deficit, much larger than in the Euro Area.
Taking these two elements, consumption and investment, internal private demand has grown by 2.6% from the trough of Q2 2009 to Q1 2013 the last quarter available. To illustrate this issue the chart below shows the private internal demand trajectory. It has been rebased at 100 during the first half of 2008 before the Lehman Brother bankruptcy.
On the chart and for a purpose of comparison I’ve also shown private internal demand in the Euro area. We see that there is wide divergence between the two measures. In the USA demand is up and +2.9% above its pre-crisis level. In the Euro Area, demand is down and -6.5% lower than its pre-crisis level.
On the chart we see that until the end of 2010 profiles were almost parallel. The divergence has begun in 2011 with the start of austerity policies: Governments then committed to ambitious reduction of their public deficit in order to stabilize public debt as % of GDP. Governments have reduced expenditures and increase taxes to converge to their target.
Looking at the private internal demand profile, how can we be convinced that it is a success?