Salient to Investors:
David Mericle and Jan Hatzius at Goldman Sachs said:
- US economic weaknesses are more cyclical than secular. US growth will rebound in 2014 to as high as 3.5 percent versus the 2.25 percent average recovery rate so far.
- The slow rate of recovery is in line with the historical response to major financial crises, and may even be better.
- The drag caused by an excess supply of houses, pressure on consumers to pare debts, poor demand abroad and the need for fiscal retrenchment is starting to ease.
- The economy won’t regain its potential until 2017 or 2018, leaving the Fed to keep its key rate near zero until 2016.
BoE Governor Mark Carney said advanced economies could regain strength and central banks can help, and while productivity has proved surprisingly weak, it is hard to see why there should have been a persistent deterioration in the rate of potential growth in Britain.
Larry Summers said in November that economies suffering from a persistent lack of demand are hard to fix with monetary policy, and that the US economy may be stuck in a rut because the interest rate consistent with full employment has fallen significantly below zero and central banks cannot cut rates much lower.
Yves Mersch at the ECB said Summers’s outlook was a highly pessimistic, even fatalistic and policy makers should step up structural reforms and encourage innovation.
John Hooley at the BoE said the full liberalization of China’s financial markets over the next decade would be almost unrivaled for its impact on the shape of the global financial system, and China’s international investment position could surge to 30 percent of GDP from 5 percent today if capital controls are reduced and the yuan traded more freely. Hooley said liberalization, if successful, could lead to more balanced and sustainable growth in China and help to rebalance global demand.
Paul Donovan at UBS said:
- An age of plutocracy is taking hold as income inequality grows and corporate profits approach historical highs. Inequality will be exacerbated because the share of national income accounted for by profits is likely to remain high. He also notes that of all the tax categories, only those on corporate income have been cut more often than raised since 2010 among 20 advanced economies.
- US corporate profits around their record at almost 13 percent of GDP. Of all the tax categories, only those on corporate income have been cut more often than raised since 2010 among 20 advanced economies.
- Since 2008, nominal income growth has diverged and within the top 10 percent of the income distribution, the richest 1 percent have seen the most significant gains.
- Gini coefficients for the US, UK, Japan, France and Canada have each risen since 2005, with the US index approaching 0.48.
- Pretax income of the top 1 percent of Americans is 20 percent of all US income, comparable to levels in the early 20th century.
- Poorer earners have suffered from inflation which has tended to be greater on the goods they typically buy.
Jay Bryson, Azhar Iqbal and Mackenzie Miller at Wells Fargo Securities said the US economy needs to rely on homegrown demand if it is to get stronger because even a 1 percent increase in economic growth in the euro area, China and Japan would have only a limited effect on US activity because exports account for just 13 percent of the US economy, lower than the 25 percent average of GDP across all countries.
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