Tuesday, 31 January 2012
Loss of growth versus trend because of the credit crisis
The chart of The Big Picture (Ritholtz) shows how far the economy has fallen below trend (by part of the economy) since the credit crisis did its New Normal damage. It is questionable if it were possible to close the gaps in the coming years. First can that be possible for exports, then for investments (you need a lot of growth for this, but that is possible, as well as by residential investment when the housing market recovers as well as by software & equipment), but for consumption you see that it still moves way farther from trend. That should happen when consumption is more than 70% of GDP.
The chart of Citigroup shows that accumulation of debts and deleveraging in the US is following nicely the average path according to the New Normal of Reinhart/Rogoff. That is not the case in the UK and the Eurozone, where the debts are still way too high and not falling fast enough and so will get more New Normal times (that probably is not going to happen in Emerging Markets, the US and Germany etc).