Below-par growth may be norm in post-crisis US economy

Below-par growth may be norm in post-crisis US economy

 

WASHINGTON – A NORMAL United States economy is likely to look a lot different – and worse – after the credit crisis is over and financial markets settle down.

Companies will continue to struggle to raise cash for expansion and innovation, as investors and lenders stay focused on conserving capital.

 

Workers, too, may have less flexibility to go after new opportunities because many will be stuck where they are – in homes worth less than the balances on their mortgages.

 

‘Once you’ve made terrible, overly optimistic errors, that paralyses you for some time,’ said economist Paul Samuelson, a Nobel laureate.

 

The bottom line: The US may have to get used to a new definition of normal, characterised by weaker productivity gains, slower economic growth, higher unemployment and a diminished financial services industry.

 

Long-term growth in the US may drop to 2 per cent to 2.5 per cent a year from the 3 per cent rate of the last 15 years, said Deutsche Bank Securities chief US economist Peter Hooper.

 

Even after markets recover, ‘the cost of risk capital is likely to be significantly higher than during the credit bubble’, he said.

 

A record three-quarters of US banks the Fed polled last month said they were charging corporate borrowers a higher premium over what they paid for funds. More than half reported tighter lending standards.

 

Firms also face a tougher borrowing environment in the bond market.

 

Workers, too, are feeling the fallout from the credit crisis. The declining value of houses – the biggest asset for many Americans – has a lot to do with their pessimism.

 

The depressed housing market may keep some workers from pulling up stakes to pursue new employment, said Ms Sally Stetson, co-founder of executive-search firm Salveson Stetson Group.

 

Columbia University professor Edmund Phelps, winner of the 2006 Nobel Prize for economics, said the nation was ‘in the grip of some structural forces that are moving the economy permanently to a lower level of economic activity, with an unemployment rate somewhere between 5 per cent and 6 per cent.’

 

Unemployment last month was 5 per cent.

 

BLOOMBERG NEWS

 

Source: Straits Times

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