GOLDMAN PREDICTS GREAT STAGNATION

 
Julian Harris
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THE GREAT recession is in serious danger of becoming “the Great Stagnation”, according to research published by Goldman Sachs.

“Both Europe and the US are remarkably close to the typical stagnation trajectory,” the report said, calculating that there is as much as a 40 per cent chance of major parts of the West experiencing an extended period of sluggish growth.

“Unless growth picks up substantially in the next couple of years, we are likely to have mapped out a five year period of stagnant growth,” the bearish note warned.

Countries with the highest chance of being stuck in a period of stagnation for eight or more years include Belgium, Italy, Japan, Austria, France and the US. The worrying verdict for America came as the country’s GDP in the year to the second quarter was revised upwards, yet remained relatively sluggish at just 1.3 per cent.

The Federal Reserve’s latest attempt to stimulate the economy -- “Operation Twist” -- has caused 30 year mortgage rates drop to an all-time low of 4.01 per cent on average, it emerged yesterday.

The UK is roughly half as likely to be entering a period of stagnation as the US, however, with Goldman Sachs estimating a roughly 20 per cent chance.

Dominic Wilson, lead author of the report, painted a stark picture: “If a country grew at the mean stagnation rate over a period of 10 years, it would end up with a level of income more than 20 per cent lower than it would have been had it grown at the post-World War Two average,” he said.

Wealthy nations have a greater chance of succumbing to a growth slump than emerging markets, the report said. China, Russia and India have a virtually zero per cent chance of stagnation, calculations showed.

Financial crises often correlate with periods of great stagnation, the report said, while another sign of risk comes from stock market crashes.

The warning will send shivers through financial markets around the world. The FTSE is down 13.4 per cent since early July while the Dow Jones has lost 13.6 per cent over the same period.

“Stagnation periods tend to be either preceded or coincident with stock market crashes more than 50 per cent of the time,” Wilson said.

And yesterday Citigroup downgraded its forecast for global growth next year to 2.9 per cent.

The news piles more doom onto the economic outlook, with government debt crises in the Eurozone continuing to weigh on sentiment.

At an auction yesterday, Italy paid the highest yield on its 10-year bonds since the introduction of the euro in the first long-term sale since Standard & Poor’s cut the country’s sovereign ratings.

The 10-year yield rose to 5.86 per cent at the auction, up from 5.22 per cent a month ago.