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A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Becoming Japan (Part 1)


Five years ago, the summer before the Lehman collapse, ECRI’s research found that U.S. economic growth had been stair-stepping down in successive economic expansions, going back to the 1970s. So, even before the Global Financial Crisis (GFC) and deleveraging concerns came to the fore, we predicted a feeble economic expansion to follow the then-ongoing recession.

We extended our research to other major developed economies, most of which exhibited similar patterns of slowing trend growth. Driven by deep structural changes, these patterns were likely to result in low trend growth for many years to come – with or without the deleveraging that followed the GFC.

In the chart, the rear row of green bars depicts average GDP growth in each economy from 1980 to the beginning of the 21st century (for Japan the green bar shows average GDP growth from 1980 to 1992, which saw the first recession of its “lost decades”).  

Japan’s entry into its lost decades (1992 to present, red bar), and the other developed economies’ entry into the 21st century (yellow bars), saw major downshifts in growth.

Notably, the U.S. and other major developed economies have experienced slower growth in the last five years (blue bars, front row) than Japan experienced in its lost decades (red bar). Chinese GDP growth has also declined.

The bottom line: around the world, long-term trends in growth have downshifted, already resulting in weaker recoveries and more frequent recessions than most had expected when the 21st century began. The response, following Japan’s example, has been more and more quantitative easing, which has been unable to break this pattern of long-term declines in trend growth.

But to those betting on a return to much stronger trend growth, either after the end of deleveraging or after policy changes, it is simply not convenient to recognize that the downshifts in growth are global in nature, and predated both the GFC and supposed policy mistakes.

References

2012, Sep: The Yo-Yo Years, More Recessions in the West and Volatility for the Rest (Challenge, Vol. 55, No. 5, pp. 39 - 58)

2012, Mar: The Yo-Yo Years (ECRI)

2011, Dec: Recession Update, Yo-Yo Years (Bloomberg TV interview)

2010, Mar: Changing Cyclical Contours of the US Economy (ECRI)

2009, Jan: The Rebirth of Cyclical Volatility (ECRI, International Cyclical Outlook, Vol. 14, No. 1)

2008, Aug: Shallow Recessions, Shallow Recoveries (NYT)

2008, Aug: Secular Weakness May Undermine Recovery (ECRI, U.S. Cyclical Outlook, Vol. 13, No. 8)

Related News & Events

Bloomberg Interview on Becoming Japan

Bloomberg July 30, 2013

ECRI's Lakshman Achuthan joined Bloomberg TV this morning to discuss our recession call, and how the U.S. economy is now resembling Japan's "lost decades." More

 

Becoming Japan (Part 2)

ECRI November 4, 2013

Inflation has already turned lower in the U.S. and the Eurozone than in Japan. More