Why We’re Not in for a Sudden Takeoff

“Calling the Trend” Column, by George Leong, B.Comm.

Stop expecting the U.S. economy to suddenly take off. It will not happen; in fact, it could take several years before we see high sustained growth. Not until the housing and jobs markets fully recover will we see superior growth. If you don’t believe me, take a look at what Federal Reserve Chairman Ben Bernanke told Congress. He said that interest rates that are low would be required to drive the economy. The news is positive, but really not unexpected. And then the results of the Beige Book confirmed this and suggested slow growth.

Yet, it is not only happening in America. Overseas, interest rates were left unchanged in both England and the European Union (EU), which is not surprising given the anemic economic growth there. The latest economic sentiment readings in the 16-country EU weakened in February. The current estimates peg economic growth in the EU at a mere 0.7% in 2010.

You also have the debt crisis in Greece. The concern is that the crisis in Greece could spread through the European Union and impact economic renewal. In fact, Greece came out and said that it would increase the country’s sales taxes to 21% to help alleviate the debt burden. But, at a time of slow growth, you have got to wonder about the wisdom of this. Nevertheless, at the end of the day, dealing with the debt is key for not only Greece, but also for the European Union. Having traveled through Greece, I can say that the same thing happened in the 90s, when interest rates were high, and it negatively impacted infrastructure growth. Of course, the problems in the EU could and most likely would spill into the U.S. The EU has over 300 million consumers, an important economy that needs to recover and grow.

In Asia, Japan is seeing some growth in its employment, but the country, the second largest economy in the world, continues to be in a funk that has lasted for over two decades. Some economists equate the situation in Japan to what is going on in the U.S. and believe that the latter could be in for years of difficulties. While there are similarities, I do not think the U.S. is in the same heap of trouble as Japan was in. Yet, with the escalating deficit and debt in the U.S. along with problems in the jobs market, you cannot rule out the fact that we could be in many more hurdles ahead of us.

The path will not be easy. Just take a look at the jobs and housing markets and you’ll understand the gravity of the situation we are in. So far in 2010, trading is reflecting the worries towards economic renewal. Don’t get too relaxed. We are still quite a way from the glory days of free capitalism.