Industrialised world risks ‘lost decade’

By: FRANCESCO FONTEMAGGI

PARIS – With momentum sputtering in many countries, economists fear the industrialised world is facing a period of slow growth and high unemployment similar to the “lost decade” endured by Japan in the 1990s.

“The risk... is higher than ever,” said Philippe Trainar, a professor of economics at Paris-Dauphine University.

“The latest data shows that we were too optimistic about a recovery in the United States and maybe too pessimistic about Europe.”

The bursting of a financial and property market bubble in Japan in the early 1990s pushed what was then the world’s second economy into deflation – a period of sharply declining prices and salaries.

Japanese economic growth during the 1990s averaged out at just one per cent a year and the country’s economy has now been overtaken by China.

“The Japanese experience shows debt reduction is a very slow process and budgetary and monetary support measures are not enough for speeding up growth,” said Francesco Giavazzi, an economist at Bocconi University in Milan.

US economist Carmen Reinhart from the University of Maryland agreed, saying: “The chances that the US and the European economies will be on a very slow path for the next decade are extremely high.

“It’s very likely that we will have seven to ten years of high unemployment in the US,” she added.

The main problem, economists say, is that a widespread lack of confidence in the future is making households cut down on consumption and save more, especially since many people are heavily indebted.

Demand is therefore not strong enough to restart the economic engine.

There is disagreement among the experts, however, on whether the current stagnation in Europe and the United States could actually lead to deflation, which would further wreck the global economy.

James Bullard, a member of the US Federal Reserve’s interest rate-setting panel, has warned that the US economy risks “Japanese-style” stagnation and has cautioned about “the peril” of deflation.

Writing in a Fed journal, he said the United States was closer to a lost decade “than at any time in recent history.”

In a speech last month, Fed chief Ben Bernanke said the central bank was determined to prevent deflation but said the risk was low.

Persistent economic weakness over the next few months “would likely increase the perceived risk of deflation” and spark counter-measures by the Federal Reserve, economists at Goldman Sachs said in a recent research note. – Nampa-AFP

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