The financial crisis began in the US. There was good reason to believe at the time that the problem lay with the American style of capitalism, including a footloose financial sector that had bloated to dangerous levels.

Anti-Wall Street demonstrators block the entrance to Terminal 18 of the Port of Seattle in Seattle, Washington. File photo

The situation in the US suddenly seems sunny. Key data on business confidence, consumer spending, new residential construction and jobless claims suggests that things are looking up in America. Many economists expect its economic output to expand by a handsome 3.5-4% in the fourth quarter. The coming year could see a tussle between expansionary momentum in the US and recessionary trends in Europe. The balance between the two will be critical.

The relative strength of the US economy is impressive given the fact that the risks of a double-dip recession seemed very high around this time last year. Let’s also remember the scare in August, when the world’s largest economy and biggest debtor came perilously close to a default become of political brinksmanship in Washington.

However, the road to a strong recovery is still not evident. First, there is a possibility that US lawmakers will not extend income support for long-term unemployed and a payroll tax cut, two policies that are being hotly debated in the primaries season. Second, some economists point out that the rise in output in the fourth quarter is significantly because of restocking of inventories. The longer-term growth rate in the US will continue to be less than 2%, far better than what many expected at the beginning of 2011 but perhaps not strong enough to create enough jobs to make a significant dent in the unemployment rate (which has come down largely on the back of the fact that many despondent Americans have dropped out of the labour force).

The recovery in the US and the recession in Europe are taking place against the backdrop of deleveraging. That continues to be the biggest challenge for the rich countries. The credit bubble of the first decade of this century has popped; but households, governments and financial institutions will still have to cut their leverage. That will continue to be a load on Western economies.

Mark Carney, head of the Canadian central bank, did well to remind the world that there is still a leverage problem. Global deleveraging will be a prolonged process, which Carney says will have to be managed through a combination of debt restructuring, inflation and growth. There will be pain ahead as well.