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During 2011 real U.S. GDP will grow by 3.4 percent but unemployment will remain “persistently high,” said Randall Kroszner, Norman R. Bobins Professor of Economics and former governor of the Federal Reserve Board. “It seems to a part of U.S. recoveries now that we can shed jobs quickly but it takes longer for jobs to come back,” Kroszner said during Business Forecast 2011 at The American Club in Beijing on December 15, 2010.
The U.S. is likely to continue to see slow job recovery because of uncertainties about health care and its costs, tax rates, and regulation, he said. “Uncertainty about the costs of health care is one factor reducing the willingness of firms to hire workers, because they don’t know what the costs are going to be and they are quite worried about that,” Kroszner said.
The U.S. will continue to experience “reasonably good” growth in investment in equipment and software and in business cash flow, but will see a decline in growth of business profitability, he said. “Profitability will not grow nearly as strongly as during 2010, but firms will remain reasonably profitable,” Kroszner said. “Because of continued high productivity growth, the basic engine of production is not broken. The recovery has actually been reasonably balanced, with the important exception of big holes in the construction and housing sectors.”
If the interest rates for repaying debt continue to outpace growth in most European countries, they will be forced to cut spending, raise taxes more or default (through inflation or by not paying all that is owed), said Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance and Richard N. Rosett Faculty Fellow. “If people become convinced that there is no growth, that the banks are going to need to be rescued, and that countries are already on the hook for issuing much more debt, markets are going to demand such a high risk premium that the countries won’t be able to borrow on terms they find acceptable,” Kashyap said.
Because it has the most money, Germany must be involved in any potential rescue in Europe, he said. “Until there is a resolution of whether Germany is prepared to pay and how much it’s prepared to pay, you’re going to continue to see this problem,” Kashyap said. “It’s not going to go away through announcing ever more large programs that just reshuffle who owes what to whom.”
Greece will never repay the bailout provided by the International Monetary Fund, he said. “They bought some time, but eventually they’re going to have to restructure,” Kashyap said. “Once Greece defaults, the German public may say, ‘We’ve been giving and giving and giving, and you keep lying to us about what’s going to happen and why. Enough of this.’ If that happens, you could have another period of chaos like we had after Lehman Brothers went under.”
Until markets “completely digest” upward revisions to U.S. growth, U.S. equity markets may actually outperform other equity markets, in particular those in emerging markets, said Morgan Sze, ’93, global head of Goldman Sachs Principal Strategies.
“During 2011, the markets will be much more focused on the change in growth rates among different types of economies than simply growth rates,” Sze said. “The growth rates in almost all other countries except the U.S. are expected to decelerate in 2011. And that is against the backdrop of higher inflation in Asia and lower inflation in developed markets.”
If markets are allowed to adjust currency in Asia, the process of addressing inflation will be smoother, he said. “That would allow for the appropriate adjustment in the allocation of resources within and across the economies,” Sze said.
--Phil Rockrohr