US Growth for Q3 is Welcome but Still a Long Way to Go

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Macroeconomics

The recent third quarter GDP figures for the US reported in the FT suggest the economy achieved 3.4% of annualized growth and is, consequently, the source of considerable cheer for companies still facing the daily grind of low demand and slow sales. Growth rates of that level suggest a return to the boom days of 18 months ago assuming they are sustained into the fourth quarter 2009 and next year but they overlook one crucial issue. There has been so much demand destruction over the last twelve months that the growth is starting from a much lower point. Even at these levels of growth (which are unlikely to be sustained) real GDP will not recover to pre-crisis levels until well into 2011. If growth in subsequent quarters drops back from this heady rate, GDP (and with it manufacturing output and demand) will not return to pre-crisis levels until the middle of the next decade.

GDP Graph

As this graph shows, a severe recession hits GDP and although growth resumes in the months that follow, the economy is disadvantaged for years to come. It is not to say that the economy never achieves the level of output it would have achieved if the recession had not taken place but the popular myth that it returns to the same level within a year or two is incorrect. According to another article, it can take 7 years or more to catch up. Of course no two recessions are the same. If the financial markets remain strong but a credit tightening response to inflation induces a recession, the subsequent growth curve will be different from say a banking crisis. In the current situation, we have had banking, finance, housing, stock market, global trade and commodities crash all at once. The UK Treasury puts the permanent loss of GDP in the region of 5%; extrapolated over the developed world that equates to some US$2 trillion of long-term loss of output.

The world economy may be returning to growth but welcome as that certainly is we should not lose sight of the fact demand levels will take years to recover and companies are rightly adjusting to the new normal as they plan for 2010 and beyond.

–Stuart Burns

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