One fallout from the credit crisis: The economy will grow at a slower speed given the reduced role of debt, at least for the next couple of years. The so-called speed limit of the U.S. economy could drop to as low as 2% after years of 2.75%-3% growth, according to economists at the country’s largest banks. The drop means that consumers and businesses will be spending less and fewer jobs will be available. Inflation should remain subdued because of the more muted demand.
Out of the eight of 17 primary dealers, banks that deal directly with the Fed and underwrite Treasury auctions, who responded to a Dow Jones Newswires survey last week on growth, one bank sees trend growth at 2%, one at 2.3%, one at 2%-2.25%, two at 2.25% and three at 2.5%. RBS sees trend growth at 2.5%, but expects it to slow to 2% this year as the labor force stagnates.
Potential, or trend growth, is the rate at which the economy can grow without stoking inflation. The majority of economists surveyed expect growth to reach
its potential in 2010 and surpass it by 2011; BNP, however, doesn’t see the economy hitting its potential until 2011.
Economists are less optimistic than the Federal Reserve, which sees real GDP growth between 2.5% to 2.7%, according to its updated economic projections released with its June policy meeting statement.
A major factor limiting the U.S.’s potential growth is the diminished role of the banking system. Banks burned by the credit crisis and facing tougher government regulations, are relying less on borrowed cash. That means less money making its way to consumers and businesses and subduing growth. Also holding back growth: consumer spending, which comprises about 70% of GDP. Consumers, already grappling with high debt, have been scarred the last two years by steep stock market losses, a weak labor market and falling home prices. Consumers are saving more, and spending and borrowing less, especially given tighter lending standards, and will continue to do so. In May, the U.S. savings rate hit a 15-year high of 6.9%.
Economists at Mizuho Securities said it could shoot as high as 10% before settling back down into a 7.5% to 8.5% range. To restart consumer spending, the labor market will need to improve, and that’s likely to take some time.
