×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

Fix the savings rate to fix the economy

Fix the savings rate to fix the economy
Comment E-mail Print Share
First Published: Mon, Feb 02 2009. 01 15 AM IST

Updated: Mon, Feb 02 2009. 11 52 AM IST
The real gross domestic product, or GDP, of the US fell at an annual rate of 3.8% in the December quarter, less than expected, but the details were disturbing. Trade and savings imbalances were only partly corrected, while federal spending increased sharply and inventories built up. Nominal GDP fell 4.1%, causing the US debt-to-GDP ratio to increase. The US economy’s biggest problem may well be its debt overhang.
Click here for breakingviews.com
The consensus estimate for the decline in real GDP was 5.5%. The smaller actual decline might suggest a shallower recession than expected. But the details of the data suggest that it will merely be more prolonged. Without a large increase in inventories, GDP would have fallen 5%.
The US has been suffering from three economic imbalances: inadequate savings, a dangerous balance of payments deficit, and an increasingly disturbing budget deficit. In the past quarter, modest progress was made on the savings rate, which rose from 1.3% to 2.9%. Very modest progress was made on the balance of payments, as the benefit of declining energy prices was almost wiped out by a faster decline in export volumes versus import volumes. The budget deficit sharply deteriorated.
Heavy debt: Shoppers at a store in New York, US. The country’s debt-to-GDP ratio has increased in the December quarter. Jennifer S Altman / Bloomberg
Moreover, the US economy’s debt overhang worsened, as measured by its debt-to-GDP ratio. That’s partly because the denominator in the equation is nominal GDP, which fell the most in percentage terms since 1957.
To repair the US economy, savings need to increase while the balance of payments deficit must shrink significantly and the debt overhang must decline. Yet the federal budget deficit and debt load are both set to increase following the impending stimulus package. That could push any real rebalancing into 2010 or even 2011, suggesting a long, slow economic decline before conditions are right for an upturn.
Comment E-mail Print Share
First Published: Mon, Feb 02 2009. 01 15 AM IST