The Slow-Growth World

The U.S. is doing comparatively well as Europe struggles and the emerging economies slow.

Jeremy Glaser 26.11.2012
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This week I had the chance to hear Bill Strauss of the Federal Reserve Bank of Chicago speak, and he offered up some good news and some bad news. The good news was that the United States could likely be the strongest economy in the world right now. That was also the bad news. Even with the country's anemic growth rate and high unemployment levels, it is still in much better shape than Europe and in many ways is in a less precarious position than many emerging markets. This is hardly a minority view.

In October, the International Monetary Fund released its World Economic Outlook and the take was hardly rosy. The organization expects the world's gross domestic product to grow by only 3.3% this year and 3.6% in 2013. This is down from 5.1% in 2010 and 3.8% in 2011. Worse yet, these estimates assume that there is no escalation in the eurozone crisis and that the U.S. manages to avoid the brunt of the fiscal cliff. Given the problems facing the global economy, we may have to get used to this slow growth for some time.


Dark Clouds Have Arrived
The picture in Europe is the grimmest. Output from the eurozone is almost certainly going to contract in 2012, and growth in 2013 will be a mere 0.2%. The IMF thinks that the big economies such as Germany and France will likely escape a contraction, but the peripheral nations like Spain and Italy could very well see years of shrinking output. But the really scary numbers are on the employment front. Eurostat pegs the eurozone's unemployment rate at a staggering 11.6%. Spain stands at 25.8% with Greece not far behind at 25.1%. Youth unemployment numbers north of 50% in Greece and Spain are hard to even wrap your head around. Germany is in much stronger shape in terms of employment, with a steady jobless rate around 5.4%.

There isn't much hope that the situation in Europe is going to get better anytime soon. One of the causes of sliding growth and rising unemployment is the fiscal and structural adjustments many European countries are making. As governments tighten their purse strings, cut entitlements, and raise taxes, consumers and businesses are retrenching. And this is a process that is just beginning. It will take years to bring balance and competitiveness back to many European economies.

Now of course this fiscal tightening isn't all bad. The adjustments are needed to bring down the continent's debt loads, keep the common currency together, and put the countries back on a sustainable fiscal path. But in the short term, these changes are a big drag on these economies. Perhaps without a common currency the reforms could have been made more gradually, but given the constraints of eurozone monetary policy, the fiscal adjustments have to happen very quickly with the resulting pain.


It's Not Just the Euro
And beyond the fiscal issues, Europe has plenty of other headwinds. Uncertainty surrounding the future of the euro isn't doing much to instill confidence in businesses. Political turmoil has calmed down somewhat in recent weeks, but that could quickly move from a simmer to a full-on boil again. The banking system remains undercapitalized and doesn't seem poised to start lending again anytime soon. It could be some time before Europe returns to growth.


The problems in emerging markets are very different but still represent challenges to the world economy. The IMF expects developing Asia to grow by 6.7% this year, down from 9.5% and 7.8% in 2010 and 2011, respectively. A big part of this slowdown is because of reduced expectations for China. Latin America also looks poised to slow from 7.8% last year to 6.7% this year. Now things aren't all bad in emerging markets. These countries generally don't face the same debt overhangs that Europe and the U.S. are grappling with, and the employment situation is rosier.

The slowdown is being driven by a few factors. Many emerging economies, notably China, poured an incredible amount of money into stimulus spending and new infrastructure during the credit crisis to keep their economies moving forward. This spending couldn't' go on indefinitely, as leaders were keen to avoid creating a massive bubble that could be popped later. Now that the stimulus spigot is turned off, GDP is slowing down. The slowdown in demand from Europe and the U.S. isn't helping matters either.


Given that the U.S. isn't exactly knocking the cover off the ball in the growth department either (the IMF sees 2.2% growth this year and 2.1% in 2013) it seems like we have entered a period of very slow global growth. PIMCO's Mohamed El-Erian coined the phrase "New Normal" to describe the post-financial-crisis world where debt overhangs would slow growth for sometime. We do seem to have entered that new, slower-growth steady state. Until developed countries work off their debt hangover and emerging markets make the shift from investment- and export-driven economies to consumer-focused ones, we're going to have to get used to slower growth.


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Jeremy Glaser  Jeremy Glaser is the Markets Editor for

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