Thursday, February 16, 2012
Eurostat came out with the Q4 number for GDP and, unsurprisingly given the stream of contractionary-looking data out of Europe lately, it showed a moderate (0.3%) drop over the prior quarter. I wanted to contrast it to the rather stronger US data, so the above picture shows the level of real GDP for both economies with both normalized to set Q4 of 2007 to 100 (ie just before the great recession). Data are from Eurostat and the BEA.
You can see that both took about a 5% hit to output in the great recession, but that the US economy has since been recovering somewhat faster and is now clearly above the level of the pre-recession peak. Meanwhile, Europe appears to be experiencing a double-dip recession due to the unresolved sovereign debt issues there and the strongly contractionary fiscal policy being pursued, particularly in the periphery.
So at the moment the US looks relatively decoupled from the problems in Europe. I would expect that the strongest channel of coupling, by far, would be in the financial system: major bank failures in Europe would affect the US financial system and then the real economy. Right now it appears that the ECB is successfully averting that, and in the absence of that, trade linkages are not that strong:
Certainly in the short term the US is looking much better. However, the medium term picture I think remains rather clouded as the US is running massive government fiscal deficits, and is likely to continue doing so as far as the eye can see:
And that's with CBO growth assumptions that don't include any further oil shocks, whereas in my universe, further oil shocks are a virtual certainty. Additionally, the US continues to run a massive trade deficit in which we are basically exchanging financial assets (promises to pay in future) for oil (first) and manufactured goods from China (for most of the rest):
Obviously, the future is eventually going to arrive and we are going to have to pay for the oil and toys we are not fully paying for at present.
In short: enjoy it while it lasts!