We Could Be In Trouble If Global Growth Stays This Low Much Longer

"When it comes to the state of the global economy, there’s both good news and bad news to report. On a positive note, Credit Suisse economists forecast that global GDP will increase 3.3 percent this year, an improvement over last year’s 2.9 percent expansion. The bad news? Even at that improved level, growth is merely hovering near the 40-year average of 3.4 percent. Since we’re technically in a recovery, the economy should be growing faster than average, and the fact that it isn’t indicates potential GDPis lower than in other recoveries.
Neal Soss, Credit Suisse’s Vice Chairman of Global Fixed Income and Economics Research, says that it’s not unusual to have periods of sluggish growth after a major financial crisis, as governments, businesses, financial institutions, and consumers retrench. The danger arises if that retrenchment phase drags on for too long. At that point, mediocre growth can start to feel more permanent, and businesses will feel a declining incentive to invest in the possibility of expansion. What’s more, the skills of the long-term unemployed can atrophy to the point that they verge on being permanently unemployable. “The downside to an episode of this sort – if that sluggish growth continues – isn’t just the slower growth itself. It’s that the potential of the economy will deteriorate,” he says.

With no new fiscal or monetary stimulus on the horizon, there is concern among economists that world leaders are running that very risk. “Most of the world is allergic to explicit fiscal stimulus and the public sector balance sheet leverage it implies,” Credit Suisse’s fixed income analysts wrote in their most recent quarterly global economics survey, “Speeding Up to Average.” European officials have imposed stringent austerity requirements on Greece, Spain, Portugal, and Ireland in exchange for their various bailouts. A combination of tax increases and spending cuts over the last four years have reduced the U.S. budget deficit from 10 percent of GDP in 2009 ($1.4 trillion) to a projected 3 percent ($514 billion) this year. Japan’s consumption tax rose from 5 percent to 8 percent without any accompanying monetary stimulus, a reflection of how eager Japanese policymakers are to shrink both the deficit and the public debt, which is twice the size of the economy. Meanwhile, Chinese authorities are trying to rein in local government spending by reducing credit availability, while Brazil pledged to cut its budget by $18.5 billion in February to meet a budget surplus target of 1.9 percent..."

at http://www.thefinancialist.com/global-gdp-living-down-to-its-potential/#ixzz2zGPMwdde