Economic policy and recessions: How will we cope with another downturn?

Posted: May 13, 2015 in economy
Tags: , ,

HOW strong is the American economy? Forecasters are pretty confident; the average prediction is for 2.6% GDP growth this year and for 2.8% next. But actual growth was just an annualised 0.2% in the first quarter and, after disappointing retail sales numbers for April, the Atlanta Fed's GDPnow model, which was pretty accurate about Q1, is going for just 0.7% annualised in Q2. Citigroup's economic surprise index (which shows whether data have been better or worse than forecasts) has been relentlessly negative since the start of the year.Does this mean the US is heading towards recession? Not necessarily. Whether or not you call it "secular stagnation", the developed economies are in an era where growth seems to be stuttering; last year's first quarter dip in GDP was a case in point. However, as HSBC points out, it is now six years since the US economy bottomed – a reasonably long cycle by pre-1980 standards. Suppose that developed economies did slip back into recession. What could the authorities do?What they normally do is to cut interest rates; since the mid-1970s, the average downturn has seen cuts of 6.2 percentage points. But of course, many countries haven't managed to increase rates this cycle. Rates are close to zero; they can go negative, as Switzerland and others have shown. However, they can't go very negative (certainly not by 6 percentage points); people really …<div class="og_rss_groups"></div>

via Economic Crisis


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