Last week saw a couple of growth forecasts being cut as the lingering effects of the financial crisis continue to weigh on the economies of developed countries.
The OECD, an organization which counts many of the richer countries as its members, downgraded its expectations for growth and now predicts 1.8% growth in the U.S. economy next year compared to 3.1% it forecast in May. The euro zone is only expected to manage a 0.3% increase in GDP in 2012 opposed to a prediction of 2.0% growth just six months earlier. The OECD points to factors such as firms putting off investment due to uncertainty over the direction of the economy as well as households spending less as they worry about jobs and weak returns on investments in stocks and property. Deeper cuts in government spending are also seen as having a negative effect as many governments rush to lower their levels of spending.
The Federal Reserve, the central bank of the U.S., also published a lower forecast for U.S. growth. The U.S. economy is predicted to expand by around 2.7% rather than the forecast centred around 3.5% growth which was released in June. Unemployment had been expected to fall more quickly from its current level of 9.1% to near 8.0% next year, but is now forecast to only edge down to near 8.6%. The forecast had been changed due to underestimation of the lingering effects from the financial crisis and the weak housing market.The weakness in the economy has prompted the Federal Reserve to state that it expects to keep interest rates close to zero until the middle of 2013.
The release of the lower forecasts suggests that even economists are struggling to come to terms with the impact of the financial crisis. These effects are difficult to come to grips with due to the scale of the problems built up during the boom years when the easy availability of debt propelled asset prices (i.e. prices of stocks and property) to exorbitant levels. It will continue to take time for these imbalances to work themselves out and for asset prices to adjust to suitable levels (i.e. fall). The inability of politicians in both Europe and the U.S. to work constructively toward a solution is further compounding the problem. But there may be little that the politicians could do anyway. The typical tools for perking up the economy are either not available (high government debt means that politicians can’t spend to create growth) or are not proving that useful (options in terms of monetary policy have already been exhausted with interest rates near zero and central banks unable to print enough money).
So the answer is that no one really knows for sure how much this period of weak growth will continue for. Economist tend to have faith in the market to create a setting where growth is possible but a return to a steady expansion may still be a way off due to the problems mentioned above.
The recent economic turmoil raises many issues, some of which I will try and deal with in this blog. But if there are any particular topics you would like me to deal with or questions you may have, please let me know.