The ‘New Normal’ and the New Drivers of Global Growth

1. The ‘New Normal’ and the New Drivers of Global Growth Prof. Vivekanand Jayakumar Department of Economics Sykes College of Business University of Tampa Florida, USA

2. The “New Normal” • Economic recovery in the aftermath of the financial crisis in countries/regions such as the US, UK, and the Euro-zone periphery is likely to be unimpressive • Unemployment rates in advanced countries likely to remain at elevated levels • Asset market returns in advanced countries are likely to be below pre-crisis average levels for the foreseeable future • Household deleveraging and subdued consumption likely to prevail in the short-run as post-crisis retrenchment continues in advanced economies • “We coined the term “New Normal” at PIMCO in early 2009 in the context of cautioning against the prevailing (and dominant) market and policy view that post crisis industrial economies would revert to their most recent means” - Mohamed A. El-Erian, CEO, PIMCO (Per Jacobsson Foundation Lecture)

3. Pre-Crisis Growth Drivers • Past Drivers of Global Growth • During the past decade and a half, a critical force driving the global economy was the insatiable appetite of the US consumer • Driven by back-to-back asset bubbles, increased access to cheap credit, and relaxed financial standards, US consumers went on a debt fuelled consumption binge

4. American Consumption

5. American Household Consumption

6. American Household Saving

7. American Household Debt Levels • US Household Debt Levels • After more than a decade of rapid growth, debt levels are finally declining as Americans focus on fixing their balance sheets

10. US Household Balance Sheet Fixes • Two basic ways to reduce debts: • People can pay off existing loans, or • People can renege on the loans, forcing the lender to charge them off. • Not surprisingly, the latter accounted for almost all the decline. Based on data from the Fed and the Federal Deposit Insurance Corp., the WSJ reported that for the two years ending June 2010, banks and other lenders charged off a total of about $588 billion in mortgage and consumer loans. • So, consumers managed to shave off only $22 billion in debt through belt-tightening. In the absence of defaults, they would have achieved an annualized decline of only 0.08%. • But it is worth noting, that consumers have sharply curtailed their appetite for new debt.

11. US Labor Market – Gradual Recovery at Best Source: BLS

12. US Labor Market – Gradual Recovery at Best Source: BLS

13. Source: Globalization’s critical Imbalances by Lowell Bryan (McKinsey Quarterly, 2010)

14. Advanced Economies – Deleveraging and Slow Growth • According to a recent McKinsey Global Institute report, deleveraging in many advanced economies is likely, following years of rapid growth in both private and public sector debt • Reference: The Looming Deleveraging Challenge By Susan Lund, Charles Roxburgh, and Tony Wimmer (McKinsey Quarterly, Jan 2010)

17. Challenges for Advanced Economies • Rising concerns regarding fiscal deficit and national debt levels • Stubbornly high unemployment rates • Wary consumers and cautious businesses • Structural imbalances, especially in US, UK and the PIIGS (Portugal, Ireland, Italy, Greece, Spain)

18. IMF’s WEO (OCT 2010)

19. New Growth Drivers • Emerging Markets have to take up the slack • Global growth likely to be driven by BRICs and other emerging markets • Household and financial sector balance sheets in emerging economies are in far better shape relative to advanced economies

20. Source: The Economist

21. Source: The Economist

25. Source: Booz & Company (2010)