Bloomberg News

‘Great Stagnation’ Looms as Confidence Lags, Goldman Says

September 30, 2011

(Updates with Chinese, German data in eighth paragraph.)

Sept. 30 (Bloomberg) -- The U.S. and Europe face about a 40 percent likelihood of a prolonged period of economic stagnation should policy makers fail to restore confidence, according to analysts at Goldman Sachs Group Inc.

“The prospect of a long period of stagnant growth is a plausible risk and a legitimate concern for the major developed economies,” Jose Ursua, a Goldman economist in New York, wrote in a report. “Whether these countries manage to avoid a ‘Great Stagnation’ by a pick-up in the recovery is likely to depend on policy being able to restore confidence and putting in place reforms that can decisively jolt growth.”

The U.S. and Europe are already exhibiting signs that would be typical of stagnations, characterized by “high and sticky” unemployment, an average 0.5 percent growth rate in per capita gross domestic product and stock markets that underperform historical averages, Ursua wrote after analyzing 93 episodes of the condition in the past 150 years. Economies face a higher probability of such periods after market crashes “precisely of the type observed during 2008-2009,” the report said.

Constraints on monetary policy today are “tighter” than in 2008 for developed economies to avoid lengthy periods of stalled growth, according to the report, dated Sept. 28. Central bankers may begin to consider “truly unconventional ‘unconventional’” policies as a result, Ursua wrote.

‘Bad News’

“The bad news is that it is still far from clear whether enough has been done to jolt economic growth upwards and outside the zone where prolonged stagnation is a serious risk,” he said. “The good news is that policy makers are more aware” of the damage wrought by stagnation.

The U.S. Federal Reserve is replacing $400 billion of short-term government debt with bonds of longer maturity in a bid to lower borrowing costs and bolster the economic recovery. Most Bank of England policy makers said this month it’s “increasingly probable” more asset purchases will be needed to support growth, while European Central Bank officials are likely to debate restarting their covered-bond purchases and further measures to ease monetary conditions.

The U.S. economy will expand 1.8 percent in the third quarter according to a Bloomberg survey of economists conducted Sept. 2 to Sept. 7, down from a 2.1 percent estimate in an August survey.

China Manufacturing

A report today showed Chinese manufacturing shrank for a third month in September, and German retail sales fell the most in more than four years in August. Two years into the euro-area debt crisis and with investor concern growing that Greece will be unable to avoid default, the U.S. is urging European governments to go further and show more urgency. German lawmakers yesterday approved an expansion of the European Financial Stability Fund, and the overhauled rescue package may be in place by mid-October.

Ursua wrote that the chances an emerging economy will stagnate are “much lower” than for developed nations, and its research put China, Russia and India at the bottom of the scale. For all countries, the unemployment rate rises an average of 3 percentage points from the period before the bout of stagnation.

Income levels for a country saddled with a decade of stagnation would be 20 percent lower than if it expanded at the average rate since the end of World War II, Ursua said. Inflation also is usually “much lower and flatter.”

“This reflects demand pullbacks that may be difficult to correct if they persist for a sufficiently long period of time,” the report said. “It also underscores the importance of policy efforts focused on averting deflation.”

--Editors: Chris Anstey, Fergal O’Brien

To contact the reporters on this story: Aki Ito in Tokyo at; Jennifer Ryan in London at

To contact the editor responsible for this story: Paul Panckhurst at

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