| Log In | Register Now
By Stella Dawson
January 22, 2012 3:21 PM EST
Five years after the credit crisis began, Western economies are confronting the prospect of a lost decade of growth, and international diplomats are warning the damage could get even worse if Europe allows its sovereign debt crisis to fester much longer.
International Monetary Fund chief Christine Lagarde is heading to Berlin on Monday to urge action after the IMF called for member countries to provide the fund with $500 billion for new loans to help out troubled countries.
G20 officials also say Europe must double the size of its rescue fund to $1 trillion as a crucial step to stabilize financial markets and prevent the euro-zone crisis from spreading. Europe finance ministers meet on their debt plan on Tuesday.
The World Bank already sees the damage taking hold as European banks pull back their lending to emerging economies. Last week it slashed its growth forecast more than one percentage point to 2.5 percent for 2012, a pace not seen since 2008 when the world was last in a global recession.
"The risk of a global freezing-up of the markets and as well as a global crisis similar to what happened in September 2008 are real," Justin Lin, the chief economist for the World Bank, said.
Follow us
The IMF also is set to cut its growth forecasts this week.
Although the United States has shown encouraging signs in recent weeks, the economy remains far too feeble for any upturn to be either strong or sustained. Europe is no better off and already appears to have fallen back into a mild recession.
Goldman Sachs calculates that per capita GDP growth in the United States has shrunk by 0.7 percent each year between 2007 and 2011, compared with 2.0 percent growth in the decade prior to the recession. In the euro area, the decline has been similar, 0.6 percent drop against a 1.8 percent pre-recession rate.
The concern is that the destruction of skills and capital investment caused by recession and slow growth rates will lead to a structurally lower rate of growth and higher rate of unemployment for a protracted period. If left unchecked, it would make it even harder to handle huge government debt loads, making the growth outlook even less stable.
Jerome Levy Forecasting sees the United States trapped in a low growth cycle throughout the rest of this decade, at least until household debt levels are paid down, businesses have restructured to regain competitiveness and wage growth returned.
"We are not holding our breath for a rapid turnaround. In fact for this year, we are investing in scuba gear in case it worsens," said economist Robert King.
FED PREPARES
It is against this backdrop that the Federal Reserve is preparing to unveil an overhaul of its long-run goals and strategy for conducting monetary policy on Wednesday, a move that could lay the groundwork for further steps to support the U.S. economy if needed.
The Fed on Wednesday will begin publishing the interest rate forecasts from its individual members. While seemingly a technical step, it can help shape investor expectations on the outlook and possibly will be used to signal an even longer time period that the Federal Open Market Committee plans on keeping interest rates at extremely low levels.
We value your privacy. Your email address will not be shared.
