Dig in for the New Normal...
SINCE LATE 2008 and early 2009 – the depths of the financial crisis – economies around the world have started to recover, writes Andrew Sentance, former member of the Bank of England's Monetary Policy Committee.
In Asia and other emerging markets, growth has been strong. But in the UK and other western economies, recovery has been relatively slow and uneven. Business and consumer confidence in most western economies remains fragile and financial markets are volatile. The current financial market preoccupation with the Euro crisis is just the latest of a long "worry list" of issues affecting financial sentiment.
Another feature of the economic climate in recent years is volatility and upward pressure on energy and commodity prices. Since the mid-2000s, healthy growth in both western economies and in the emerging markets has not been achieved without strong upward pressure on global energy and commodity prices. These bursts of energy and commodity price inflation have made cost control difficult for business and pushed up consumer prices, choking off spending growth. This has added to the volatility of the current economic climate.
A key question for business is how long this pattern of disappointing growth and volatility will last? Is this the "new normal" or are we about to break out of this pattern and emerge into the "sunlit uplands"?
One thing is pretty clear. We are not going to return to the "old normal" we saw prior to 2007, when growth was underpinned by high leverage in deregulated financial markets, providing relatively easy access to finance for consumers and businesses. We face a prolonged balance sheet adjustment in the financial sector, reinforced by tighter regulation – and the era of easy credit which preceded the financial crisis is unlikely to return. If a new wave of sustained growth does emerge in the future, it will need to be underpinned by a different set of forces.
And it also seems likely that a new wave of sustained growth will not emerge quickly. The major western economies are in the middle of a prolonged period of adjustment. The imbalances in the economic and financial system have built up over a long expansion which started in the early 1980s and continued for quarter of a century until 2007, with a brief interruption to growth in the early 1990s. Not only do we face the legacy of the financial crisis, but western economies face an adjustment to co-existing with the rising powers of Asia. Confidence in policy-makers has been eroded by the experience of the financial crisis and will need to rebuilt. All this will take time.
The long expansion of the 1950s and 1960s was followed by around a decade of volatility and disappointing growth starting in the 1970s and continuing until the early 1980s. We may not be facing the rampant inflation of that period. But just as economies took a long time to adjust after the era of "full employment", we probably face a similar prolonged period of adjustment after the long financially-driven expansion which ended in 2007.
It seems likely that the "new normal" of disappointing western growth, coupled with volatility in financial and energy/commodity markets will continue for a few years yet – into the mid-2010s. Businesses need strategies which will help them survive this period – while looking to make the most of growth opportunities opening up in emerging markets, and which are occurring in more traditional markets in response to changes in society, technology and regulatory frameworks.
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