Jeffrey: Below trend growth is the new normal

Cazenove's CIO Richard Jeffrey has criticised policymakers who expected the global economy to bounce back to pre-crisis levels after 2009, branding such expectations a 'fallacy.'

Jeffrey said a drop-off in domestic consumption coupled with rising inflation in Asia meant growth could not rebound to normal levels, and he expects it to remain sluggish for the rest of the year.

"The fallacy in thinking has been that the world economy could return to anything like a normal growth path after the 2008/09 recession. To this extent, post-recession growth rates recorded for many countries have been unduly flattering."

Jeffrey said various factors had been blamed for the sub-trend growth suffered by the UK economy, including weather conditions and the royal wedding, but he is sceptical over the scale of their impact on the economy.

"The essence of the problem is clear: the weakness of the recovery in final consumption expenditure. Final consumption consists of household and government current spending.

"In the UK, these accounted for 85% of total domestic demand in 2010. In the US, they were 84% and in Germany, 79%. For the UK and US, in particular, it was domestic demand that created the momentum behind growth in the years leading up to the recession," he said.

"If the non-German West is to achieve trend growth rates that are anywhere close to the pre-recession trend, economies will have to reorient towards exports. The track records of the US and UK suggest that this will not be easy."

Jeffrey is predicting a tough second half for the global economy, as Asian economies in particular continue to be hampered by soaring inflation.

"Asian economies are experiencing the effects of demand destruction due to rising inflation, which means it is inevitable that global growth will slow for the rest of the year," said Jeffrey.

"While we do not think this means we are facing imminent recession, even after this deceleration has ended we should be cautious about growth prospects.

"Having experienced a long, overheated cycle, characterised by rising current and capital account imbalances in the world economy, business cycles are likely to be shorter and, for most Western countries, sub-standard in the context of growth rates achieved earlier this century."

Jeffrey also said the US' decision to implement QE2 has sparked deflation, as it has caused inflation to soar against a backdrop of stagnant wage growth.

Following with this inflation, particularly in energy prices, companies have been forced to reduce wages or leave them on hold in order to protect margins, adding to downward, rather than upward, price pressures.

"It is evident quantitative easing has accommodated rising inflation at a time when wage and salary growth has remained exceptionally low," said Jeffrey.
"In fact, it can be argued quantitative easing, in particular by the US, has actually helped cause this deflationary environment.

"Due to the huge amounts of liquidity injected we believe central banks have been responsible for a not-insignificant portion of the raw material and energy cost inflation that has been seen over the past two years, which has resulted in companies reining in wage settlements."