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Slow growth: structural not cyclical

Bill Gross  |  10 Dec 2012Text size  Decrease  Increase  |  

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Bill Gross is the managing director of PIMCO, a global bond manager.


Well, I guess that settles it - you didn't build that after all. Or maybe you did, but not all of it. Or maybe, like John Lennon would say: "You think you know a yes, but it's all wrong. That is you think you disagree."

No country for old (white) men

Whatever. Rather than an economic mandate, November's election was more of social commentary on the Republicans' habit of living with eyes closed. Their positions on what Conan O'Brien labelled "female body parts" - immigration, gay rights and student loans - proved to be big losers, and they will have to amend rather than defend those views if they expect to compete in 2016. I suspect they will. Political parties are living social organisms that mutate in order to survive.

We will see straight-talking Chris Christie or Hispanic-flavoured Marco Rubio leading the Republican charge four years from now versus a re-energised Hillary Clinton. It should be quite a show with a "No Country for Old (White) Men" caste to it.

But whoever succeeds President Obama, the next four years will likely face structural economic headwinds that will frustrate the American public. "Happy days are here again" was the refrain of FDR (Democratic Governor Franklin Delano Roosevelt) in the Depression, but the theme song from 2012 and beyond may more closely resemble Strawberry Fields Forever, as Lennon laments, "It's getting hard to be someone but it all works out".

Why is it so hard to be someone these days, to pay for college, get a good-paying job and retire comfortably?

That really was the economic question of the 2012 election towards which very few specifics were applied from either side. "There's a better life out there for us," Governor Romney bellowed to a crowd of thousands in Des Moines, Iowa just days before the election, but in truth he never told us how we were going to achieve it or, importantly, why we weren't realising it in the first place. The president's political mantra of "Forward" was even more vague.

Their words were mum if only because the real cause of slower economic growth lies hidden in a number of structural as opposed to cyclical headwinds that may be hard to reverse. While there are growth potions that undoubtedly can reduce the fever, there may be no miracle policy drugs this time around to provide the inevitable cures of prior decades. These structural headwinds cannot just be wished away as we move "forward" whether it be to the right, the left or dead centre.

Last month in a major policy speech at the New York Economic Club, Federal Reserve chair Ben Bernanke concurred that the US economy's growth potential had been reduced "at least for a time".

He in effect confirmed PIMCO's "new normal" that has been in place for three years now, laying the blame in part on the financial crisis, diminished productivity gains, and investment uncertainty due to the near-term fiscal cliff.

We do not disagree. However, there are numerous other structural headwinds that may reduce real growth even below the new normal 2 per cent rate that Bernanke has just confirmed, not only in the US but in developed economies everywhere.

They are:

1. Debt/delevering

Developed global economies have too much debt - pure and simple - and as we attempt to resolve the dilemma, the resultant austerity should lower real growth for years to come. There are those that believe in the "Brylcreem" approach to budget balancing - "a little dab'll do ya".

Just knock a few percentage points off the deficit/GDP ratio, they claim, and the private sector will miraculously reappear to fill the gap. No such luck after two to three years of austerity in euroland, however.