Achieving Growth in a Rebalanced World

MILAN – Although the financial crisis is winding down, the prospects for growth in the global economy are unlikely to pick up. This is, in part, inevitable. But it is also the result of poor coordination between governments as the world economy rebalances.

Prior to the crisis, American consumers, on average, either saved nothing or accumulated debt. That has now changed. With household wealth seriously damaged by the housing crash and other asset-price declines, pensions and retirement provisions are in disarray. Because asset prices will not reach pre-crisis levels anytime soon (that is, without inflating another bubble and risking renewed instability), household saving in the United States has risen to about 5% of disposable income, and probably will rise further.

This withdrawal of the US consumer is part (perhaps half) of the process of rebalancing the global economy. Restoring America’s savings-investment balance implies a reduction in global aggregate demand of around $800 billion.

To be sure, fiscal deficits and emergency measures in advanced economies and some major developing countries have cushioned the sharp decline, substituting in part for missing consumers. But this substitution cannot continue indefinitely. In advanced countries, governments will eventually be forced to reduce spending, and central banks will withdraw from emergency credit provisions and guarantees.