Why is economic growth so slow and what could be done to go back to rapid growth?

9 years ago - Published in Finance, Fundamental Analysis

By Dominick Salvatore 

After nearly six years from the end of the deepest global financial and economic crisis of the postwar period, growth continues to be slow and uneven in advanced countries.

 

Since the end of the 2008-2009 recession, the U.S. growth rate averaged 2.2 percent per year and is forecasted to be 2.6 percent in 2015 and 2.8 percent in 2016. While Europe and Japan would probably be satisfied with these growth rates,  the United States is not. The reason is that the recovery was not rapid enough to bring the United States back on  its long-run growth trend line following the recent deep recession, as it happened after most other postwar recessions. Despite the fall in the unemployment rate from the high of 9.6 percent in 2010 to about 5 percent in 2015, only in April 2014 did U.S. jobs return to the 2007 level, and median family income is now about $3,000 lower than in 2007.

 

Europe fared worse than the United States. Euro Area growth averaged only 0.7 percent from 2010-2014 (the Euro Area even fell back into recession in 2012-2013) and growth  is forecasted to be only about 1.5 percent in 2015-2016. The situation was even worse in Japan (which was in recession in 2011 and 2014) and growth is forecasted to be less than 1 percent for this year and the next. Britain and Canada fared better, with growth rates since the end crisis approaching those of the United States. 

The United States and other advanced nations responded to the "Great Recession" by rescuing banks and other financial institutions from bankruptcy, slashing interest rates, introducing huge economic stimulus packages, making very large injections of liquidity, and also undertaking heavy nontraditional expansionary monetary policy (quantitative easing or QE). These efforts, however, only succeeded in preventing the recession from being deeper than otherwise and from making the subsequent recovery even slower than it was. Be that as it may, growth remains the most serious economic problem facing most advanced nations today.

 

Some experts advocate additional (new) big stimulus packages to speed up growth in advanced countries, but these may not succeed to the extent that today's slow growth is due more to the slowdown in productivity and in the rate of innovations than to inadequate aggregate demand.