40% Chance of “Great Stagnation” in Developed Markets – Goldman Sachs

Interesting tidbit on the CNBC site:

  • Having analyzed 150 years of macroeconomic data, Goldman has found 20 examples of stagnation similar to those experienced by Japan in the 1990’s, most of which occurred during the last 60 years in developed economies.
  • “During these episodes, GDP per capita growth hovers below 1 percent and is less volatile than usual. They are also characterized by low inflation, rising and sticky unemployment, stagnant home prices, and lower stock returns,” Jose Ursua, an economist at Goldman Sachs, said in a research note on Thursday.
  • He predicts a 40 percent chance of stagnation in the world’s developed markets.
  • “Stagnations are more likely than you would like. Because these events are correlated with financial crises, the conditional probability of stagnation in the current environment is higher than normal,” he said. “Trends in Europe and the US are so far still following growth paths typical of stagnations.”
  • In order to avoid such an outcome, Ursua said, requires governmental policy that restores confidence and growth.  “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,” he said.
  • A lack of reliable data makes it difficult to know what sorts of policy remedies have helped pull economies out of stagnation in the past, he said, but there is a clear correlation on what causes stagnation.  “Stock-market crashes, currency crises, external debt crises and a higher income level raise that probability. Twin crises, higher growth or higher volatility lower that probability, either because they signal a worse outcome or a better outcome, not a stagnation,” Ursua said.
  • “The good news is that policymakers are more aware—thanks to Japan’s experience—of at least a part of that historical experience, if not all that we present here,” he said. “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.”
About Mark Hanna 542 Articles

Affiliation: Hanna Capital, LLC

Mark Hanna is President and Owner of Hanna Capital, LLC, a registered investment advisory firm. Mark has been a follower of markets since the late 80s, with a focus on individual equities since the mid 90s. He has been a well known commentator in the financial blogosphere for the past 5 years, following a career in corpoporate finance and accounting. Mark attended the University of Michigan where he graduated with a degree in Economics.

As an avid reader, Market Montage is the personal blogging site for Mark to share his views on economics, markets, and the like. Occasional cynicism and wit shall be deployed in his postings.

Follow Mark on Twitter @fundmyfund.

Visit: Market Montage

Be the first to comment

Leave a Reply

Your email address will not be published.