In a note to clients of PIMCO, the world's biggest bond-fund manager, strategic advisor Richard Clarida said the U.S. recession may end this year, but there will be no "traditional postwar recovery."
U.S. as "caboose," not engine, of growth
At some point, as the global financial system stabilizes, credit growth should resume, Clarida wrote. However, the "new normal" financial and economic environment, with demand for private credit growing at or below the pace of nominal GDP growth, means the global economy needs to be prepared for the U.S. "to be the caboose of the global growth train for at least the next five years," Clarida wrote.
Deleveraging is inevitable, he added, but the consequences will largely depend on how readily and effectively the rest of the world can become the engine.
Further, Clarida on Thursday told Bloomberg Radio that the U.S.'s 6.9 percent savings rate -- a 15-year high -- underscores why the world can not expect our national economy to be the major engine of global growth.
"The consumer has got religion," Clarida said. "In an economy where consumption has been the driver of normal growth, that will be an enormous headwind." Historically, consumer spending has accounted for approximately 60 percent to 65 percent of U.S. GDP.
Dilemma for U.S. -- and the world
A decade of public policy errors has created a dilemma for U.S. policymakers, business executives, and citizens. It's a variant of John Maynard Keynes's paradox of thrift (or savings).
After a decade of overconsumption, and with their nest eggs depleted by the stock market and housing slumps, Americans need to save more. And so far, they are, as evidenced by the high savings rate. But at the same time, the U.S. needs at least selected consumers to spend and stimulate the economy. How an economy can simultaneously increase its savings rate and consumption to increase GDP constitutes the dilemma. There's scant economics literature to suggest a nation can successfully pull it off, and if Clarida's analysis is correct, the road ahead is that "new normal," or a U.S. GDP growth rate in recovery stage of about 2 percent -- a European-sized growth rate -- and far below the 5 percent to 7 percent GDP growth that developed economies typically register in the early stages of a recovery.
Further, the International Monetary Fund echoed as much in its most recent report, revising its 2010 global GDP growth forecast to 2.5 percent, up from 1.9 percent -- but underscoring that the recovery, particularly in the U.S., is expected to be sluggish. The IMF added that, given weak demand in the U.S. and in other current account-deficit countries, "policies need to sustain stronger demand in key surplus countries."
Economic Analysis: With PIMCO and the IMF -- two organizations that approach GDP and economic analysis from decidedly different vantage points -- both concluding that the world cannot count on the U.S. recovery to create sufficient demand, there's a preponderance of evidence suggesting that the rest of world must generate demand to fill the gap created by the "frugal consumer" U.S. The era of "make the best and ship it to the West" is long over. For the global economy to grow at an adequate rate, middle-class and working-class citizens in China, India, Japan, Brazil and Latin America, Russia and Eastern Europe, and Western Europe must consume more.
Disclosure: Lazzaro has no positions in stocks but does own shares in two PIMCO Bond Funds: PHDAX and PYMAX.
