Tuesday, August 9, 2011

Slow Forward

The future has been postponed. Again. The shock waves from the current economic turmoil will likely lead to a downturn followed by a bounce back. Next spring. That's according to Nicholas Bloom.

The bigger picture is that we have entered a permanent era of slow growth. Especially consumer-led growth. Chris Dillow frets about the Growth Problem. He's right. Debt-laden consumers are experiencing the joys of thrift. This isn't just an Irish problem (far from it), even the UK is caught in a slow growth trap, thanks to consumer debt:
If you look at what's happened since 2008, banking debt has been reduced in the UK; but the corollary has been a rise in public-sector debt. The aggregate of debt bearing down on the UK economy remains at more-or-less record levels equivalent to around 400% of GDP.

As for a huge element of that indebtedness, household debt, that's fallen from around 180% of disposable income in 2008 to nearer 160%. But official forecasts by the Office for Budget Responsibility for any kind of meaningful economic recovery in the UK are predicated on that household indebtedness rising back to around 180% of disposable in the coming few years.

That either means the recovery won't actually materialise, because households won't want to borrow on that scale, or it means that the economy will remain vulnerable to an interest rate shock for the foreseeable future (if interest rates rise, the spending power of consumers would be devastated).
Ireland is fortunate to have a medium term, demographic momentum that is growth friendly. But with the developed world (and China) ageing rapidly, it's hard to see how economic growth can get ahead of demographic destiny elsewhere.

When and how will it end? Not by next spring, despite Nicholas Bloom's optimism. It will end with debt forgiveness, a debt jubilee or a plain old default. Though even then, the trajectory for growth will be much, much slower than the long boom that ended in 2008.

It's slow forward to the future from here on folks...

1 comment:

  1. If anything, ireland is in a better situation than many of our peers in this regard as we at least are running down our overall debts. Many key economic heavyweights are in a far more serious situation of chronic borrowing in a lender's market.

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