The strongUstrong.S. Recovery from the Great Recession A Story of Debt.pdfVIP

13 The u .S . reCovery FroM The GreaT reCeSSion: a STory oF deBT and deleveraGinG BANK OF CANADA REVIEW • W IntER 2012–2013 The u .S . recovery from the Great recession: a Story of debt and deleveraging Brady Lavender and Nicolas Parent, International Economic Analysis ƒ The prolonged period of deficient demand in the United States following the Great Recession is unusual relative to past U.S. recessions, but is consistent with historical international experience in the aftermath of severe financial crises. ƒ Loose lending standards and relatively low interest rates in the pre-crisis period contributed to a sharp buildup in household debt. Subsequently, household deleveraging has been the most important factor holding back the recovery. ƒ While a large fiscal expansion helped to sustain aggregate demand during the crisis and its aftermath, the federal debt in the United States is currently on an unsustainable trajectory. The government sector now needs to delever, which will represent a drag on economic growth for years to come. ƒ Given Canada’s close real and financial linkages with the United States, understanding the trajectory and characteristics of the U.S. recovery has important implications for the Canadian economy and thus monetary policy. In December 2007, the U.S. economy entered its longest and deepest recession since the Great Depression. Historically, in the early stages of a recovery, U.S. GDP has typically grown at a faster rate than the potential growth rate of the economy, reflecting pent-up demand from businesses and consumers and some rebuilding of inventories. Deep economic down- turns thus tend to be associated with stronger rebounds (Howard, Martin and Wilson 2011). However, the current recovery has been the weakest U.S. recovery in the postwar era. More than three years after the end of the recession, unemployment remains elevated and gross domestic product (GD