A Federal Reserve Bank Economist provides a hard look at the current economic situation.
Even with the improvements the U.S. has seen in the past year or so, we’re not completely out of hot water yet. Bill Emmons, an economist at the Federal Reserve Bank of St. Louis, says the chance that the advanced economies will fall back into a recession in the next five years is about 50%.
One driver in this is the financial health of the other major global markets. "The largest threat to U.S. expansion is further deterioration in Europe," Emmons says.
Yet an economic downturn was already in the cards before Europe’s most recent economic blunders. Before the U.S. recession of 2008, global growth was at a nonsustainable pace. "The five years before the recession were the fastest economic growth in U.S. history. In retrospect, it was too fast," Emmons says.
That rapid growth is what led to the bubble bursting in the housing and other financial markets, he says. Now, the global economies are growing, but slowly. Emmons says this slow growth will likely continue, and he pegs a 75% chance that the advanced economies will grow slowly during the next five years.
China Economy Set for a Slow Down
Emmons predicts a sluggish global economy, in part due to the dialing back of China’s economy. "China can’t possibility grow as fast over the next 20 years as in the past."
The rapid growth that country has seen in the past 10 years has caused the need for financial and governmental catch-up. Emmons says there has been too much invest-ment, not enough consumption and concern that the banking system won’t evolve to the needed levels to adequately allocate capital.
"There’s also a question whether the international market can adapt to China," he says. "The financial relationships and trade flows just with the U.S. have been causing pressure."
Implications for Agriculture
Around half of the top 10 countries that the U.S. exports corn, wheat and soybeans to are considered to be developing or emerging economies. Their economic health will greatly affect U.S. commodity prices.
Emmons says the question will be: Can the emerging economies decouple from the slow growth that’s likely to occur in the advanced world? He also gives that a 50% chance. "We need to be realistic that a lot of the growth in the emerging economies is dependent on the advanced economies through trade and stable financial conditions," he says.
Emmons cautions that if the U.S. does tip back into a recession, it will come out slowly, as ithas done with the most recent recession.
- December 2011