Australia | Nov 02 2012
– US growth is anaemic
– Households are doing the right thing
– Public sector debt is the key
By Eva Brocklehurst
Why has US economic growth been so anaemic? Why for so long? Is there light at the end of the tunnel? The answers, according to DBS Bank, lie with public sector debt. While the household sector was busy taking its medicine and reining in its debt, public sector debt grew. DBS notes US households have cut their debt load by 14 percentage points of GDP since March 2008 but government debt has grown by 34 percentage points over the equivalent period.
While US households were fixing their balance sheets they weren't spending. So, a big drag on the economy has been consumption, or the lack thereof. US GDP has averaged a bare 2% for the last four years and consumption, which is the lifeblood of the US economy at 71% of GDP, has averaged growth of just 1.75% over the last six quarters, DBS notes. Households are starting to spend again, having paid back debt over the last two to three years, but it's slow going. Leverage has been reduced as a percentage of GDP to 83%, from a peak of 98% back in 2008, just prior to the collapse of Lehman Brothers. DBS notes household leverage today is back where it was almost ten years ago and could be 'normal' in a year or so. So that's OK.
That's not the problem now. There's more. Governments borrowed heavily to bail out the failing banks after the financial crisis and they still are still indebted. Very. DBS notes, in the US, the federal deficit has averaged 8.1% of GDP for the past five years and government debt has risen to 91% of GDP from 57% back in 2008. It may not be rising any more, but it is not falling either. DBS believes tighter fiscal policy over the coming four or so years could restrain the economy to the same extent consumer de-leveraging did for the past four years.
Moreover, don't wish for public sector debt to fall sharply. DBS says this would be near enough to a bubble bursting and a recession would surely follow. As no one is wishing for a recurrence of the events of 2008/09, DBS believes Congress will legislate tax and spending changes that will prevent this. Nevertheless, the US government deficit is unsustainable and DBS suspects the debate is going to be about how best to tighten fiscal policy. Loosening the purse strings doesn't come into it.
This means slow stumbling growth is going to be around much longer. The question for DBS is whether fiscal tightening comes later rather than sooner (back-loaded), which would allow for somewhat faster growth near-term, or whether they bite the bullet and do it now, with the promise of faster growth later on. DBS notes most analysts argue for a back-loaded tightening on concerns over unemployment and confidence and expects it's the option that will win over government. So, possibly growth can get a wriggle on to 2.25%-2.50% quarter-on-quarter next year but DBS is skeptical of a return to 3%, at least until 2014. Worse still, if fiscal de-leveraging is undertaken in earnest, it could be 2017-2018 before that figure is reached.
DBS' current forecast calls for 2.5% quarterly growth only by the second half of next year, which still implies 2.1% growth in annual average terms for 2013.
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