We were already looking at a possible debt-to-GDP ratio of 102% by the end of 2011, the first time since WWII that national debt would exceed the economy, but now it might actually get worse than previous projections. Goldman Sachs (NYSE:GS) has cut its second-quarter GDP outlook to 2% from 3%, while the International Monetary Fund has cut its GDP forecast to 2.5%.
But despite the languishing economy, inflation continues to rise more than expected, making it unlikely the Fed will enter another round of economic easing, or QE3. Inflation would have to drop an entire percentage point from its current 3.6% annualized rate while unemployment would have to rise 1.25% from its current rate of 9.1% for QE3 to happen. And Goldman analysts expect that the continued weakness in growth and uncertainty of how temporary factors will play out in the long term will keep the Fed from acting any time in the foreseeable future.
But if you’re one to take comfort in the misfortune of others, it might help to know that even China (NYSE:FXI) is facing similar economic difficulties. Credit Suisse (NYSE:CS) downgraded China’s GDP outlook from 8.9% to 8.5% for next year, and from 8.8% to 8.7% this year due to consistent inflation, slowing growth, and continued tightening. Its banking sector was also given a severe downgrade, dropping to “Underweight” after previously being “Overweight”, with Credit Suisse citing concerns about the alarmingly high debt-to-GDP ratio.