State Street macro outlook

US economy will not suffer lost decade

The US is heading for a slow and gradual recovery rather than a Japanese-style lost decade, and it will once again lead G3 growth in 2012, say strategists.
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Which way for growth?
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<div style="text-align: left;"> Which way for growth? </div>

Economic forecasters have been revising down growth estimates for major economies during the past few months amid persistent unemployment in the US, slower growth in Asia and the European debt crisis, while the global economic recovery has been split — sluggish growth in advanced economies and relatively robust growth in developing countries. This trend is here to stay during 2012.

“The most advanced economy is failing to gain traction,” said Christopher Probyn, managing director and chief economist of State Street Global Advisors (SSgA) at a media briefing yesterday. “The US recovery is extraordinarily weak.”

According to historical data provided by SSgA, the strength of recoveries in the US economy has a positive correlation with the depth of recessions — the sharper the fall in economic output during recessions, the stronger the rebound.

However, the actual pace of recovery this time has lagged far behind previous recoveries. Average economic growth from 2009 to 2011 was around 2.5%, only one-third of the estimated 7% recovery predicted by linear regression with historical statistics.

Probyn explained that household wealth destruction during the global financial crisis, an oversupply of housing units and fiscal drag from the government sector are the three reasons for the poor recovery.

Despite the relatively disappointing result, Mitul Kotecha, head of the global foreign exchange strategy team at Credit Agricole, said yesterday that the US is heading for a slow and gradual recovery rather than a lost decade similar to Japan’s. The US economy will once again lead G3 growth in 2012 in spite of constraints on consumer spending and the slow pace of job growth, he added. Credit Agricole forecasts 1.9% GDP growth in 2012 for the US.

Europe’s economy has been in a negative sovereign feedback loop with significant headwinds from fiscal austerity and deleveraging in the private sector, according to Credit Agricole. “We expect a mild recession, zero growth this year,” said Kotecha.

SSgA, on the other hand, said that the chance of an exit by one or more members, or of a complete eurozone breakup, is not zero. “If the bond exchange programme does not go through and the EU, IMF and ECB do not continue to support Greece, I feel the risk of a eurozone breakup or an exit of Greece will rise very significantly,” Probyn said, “If [Greece] goes through a massive default, I do not quite see how it can stay in the eurozone.”

Asia is in a better position due to healthier government finances, which means they still have policy tools available to stimulate economic growth, according to Credit Agricole.

However, Asia is vulnerable to an external slowdown as the region is still heavily dependent on exports and the eurozone is a significant market for its products.

“We expect Asia will grow by 6.5% this year, down from 7.5% last year,” said Dariusz Kowalczyk, senior economist and strategist for Asia ex-Japan at Credit Agricole.

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