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The End of the New Normal?

WASHINGTON, DC – Just when the notion that Western economies are settling into a “new normal” of low growth gained mainstream acceptance, doubts about its continued relevance have begun to emerge. Instead, the world may be headed toward an economic and financial crossroads, with the direction taken depending on key policy decisions.

In the early days of 2009, the “new normal” was on virtually no one’s radar. Of course, the global financial crisis that had erupted a few months earlier threw the world economy into turmoil, causing output to contract, unemployment to surge, and trade to collapse. Dysfunction was evident in even the most stable and sophisticated segments of financial markets.

Yet most people’s instinct was to characterize the shock as temporary and reversible – a V-shape disruption, featuring a sharp downturn and a rapid recovery. After all, the crisis had originated in the advanced economies, which are accustomed to managing business cycles, rather than in the emerging-market countries, where structural and secular forces dominate.

But some observers already saw signs that this shock would prove more consequential, with the advanced economies finding themselves locked into a frustrating and unusual long-term low-growth trajectory. In May 2009, my PIMCO colleagues and I went public with this hypothesis, calling it the “new normal.”