Is Slower Economic Growth the New Norm?


Emerging markets, Europe, and slowed growth in the BRIC countries (Brazil, Russia, India, China) prompted the World Bank to cut its outlook for global growth, only predicting 2.2 percent this year, down from 2.4 percent.

This modest growth trajectory is being called the ‘new normal’ in a world previously accustomed to booming expansion, a time when China was growing at 10 percent a year. However, Andrew Burns, the report’s lead author, feels that such growth was largely unsustainable.

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“Growth is not slower because of inadequate demand but rather because, in our view, the very strong growth we saw in the pre-crisis period was due to that bubble phenomenon,” Burns said when speaking to reporters.

Greece was demoted this week to emerging-market status by MSCI, Inc. (NYSE:MSCI), and is one of many countries dragging on global growth. Debt-ridden, and overburdened with public employees, Greece has been forced to finally trim its swollen public sector, albeit not with 100 percent success. A sale of the country’s gas monopoly failed, while the government did act to restructure its state-owned media company.

The World Bank cut its forecast for developing countries, dropping the growth prediction to 5.1 percent from 5.5 percent previously. The bank did, though, predict a rebound in these countries, with growth regaining momentum to 5.7 percent by 2015.

The new threat to look out for in the global economic picture is massive currency expansion in the United States and Japan, according to the World Bank.

Japan’s Prime Minister Shinzo Abe has made a concerted effort to end the country’s deflationary history. ‘Abenomics’ as its been dubbed, has seen the Bank of Japan print massive amounts of money in an attempt to get inflation up to 2 percent. While the stock market was up considerably, and the yen was devalued a bit, markets have not reacted so pleasantly lately, as whenever a government talks of slowing down stimulus, reactions are dramatic by investors.

The story is largely the same in the United States, where market movement is ever more dependent on the future of quantitative easing. Ben Bernanke’s asset purchasing program has seen the U.S. markets reach record highs, but with improvements in the labor markets, Bernanke has hinted that he will slow down the life support if the trend continues.

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With markets becoming dependent on the actions of central banks, the World Bank’s concerns appear validated. One former IMF economist worries that Mr. Bernanke could disrupt markets around the globe, having only devised the policy for the U.S. Stephen L. Jen, who now works for London-based hedge fund SLJ Macro Partners LLP, said that, “Just as [the Fed] did not show much care about the possible negative side effects of its quantitative easing operations, when the time comes for the Fed to start tapering, it will not likely care about the negative side effects on the rest of the world.”

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