The U.S. and Europe face about a 40 percent likelihood of a prolonged period of economic stagnation should policy makers fail to restore confidence, according to analysts at Goldman Sachs Group Inc.
“The prospect of a long period of stagnant growth is a plausible risk and a legitimate concern for the major developed economies,” Jose Ursua, a Goldman economist in New York, wrote in a report. “Whether these countries manage to avoid a ‘Great Stagnation’ by a pick-up in the recovery is likely to depend on policy being able to restore confidence and putting in place reforms that can decisively jolt growth.”
The U.S. and Europe are already exhibiting signs that would be typical of stagnations, characterized by “high and sticky” unemployment, an average 0.5 percent growth rate in per capita gross domestic product and stock markets that underperform historical averages, Ursua wrote after analyzing 93 episodes of the condition in the past 150 years. Economies face a higher probability of such periods after market crashes “precisely of the type observed during 2008-2009,” the report said.
Constraints on monetary policy today are “tighter” than in 2008 for developed economies to avoid lengthy periods of stalled growth, according to the report, dated Sept. 28. Central bankers may begin to consider “truly unconventional ‘unconventional’” policies as a result, Ursua wrote.
‘Bad News’
“The bad news is that it is still far from clear whether enough has been done to jolt economic growth upwards and outside the zone where prolonged stagnation is a serious risk,” he said. “The good news is that policy makers are more aware” of the damage wrought by stagnation.
The U.S. Federal Reserve is replacing $400 billion of short-term government debt with bonds of longer maturity in a bid to lower borrowing costs and bolster the economic recovery. Most Bank of England policy makers said this month it’s “increasingly probable” more asset purchases will be needed to support growth, while European Central Bank officials are likely to debate restarting their covered-bond purchases and further measures to ease monetary conditions.
The U.S. economy will expand 1.8 percent in the third quarter according to a Bloomberg survey of economists conducted Sept. 2 to Sept. 7, down from a 2.1 percent estimate in an August survey.
Read the full article here:
‘Great Stagnation’ Looms, Says Goldman