One of the big themes of 2013 is the end of the US economic crisis.That’s not to say that the economy is incredibly strong (GDP growth remains mediocre and unemployment is too high) but several of the key conditions that characterised the financial crisis, and the ensuing years, are starting to fade.
The household deleveraging process, for example, is almost done. That’s coinciding with a beginning of real interest rate normalization. In financial markets, we’re seeing an end to the risk-on-risk-off situation, and more dispersion among stocks.
One of the first firms to jump on board this idea was Goldman, which made its big call that things would start to normalize in 2013, particularly the back half (and now Goldman thinks it’s possible that it’s happening already).
Others have jumped on board too.
In a new note, Morgan Stanley’s Vincent Reinhart talks about the coming inflection point for the US economy, and he also talks about the change coming in the second half of the year.
In the Morgan Stanley forecast for the US, the trajectory of economic activity marks an inflection point midway through 2013. The severe financial crisis of 2008-09 necessitated significant downward adjustments by the private sector to the levels of aggregate demand and efficient supply. As the event recedes further into history, however, the drag on growth from these ongoing level adjustments plays out.
In our forecast, the expansion of real GDP steps up to around 2-3/4 per cent in the second half of this year and beyond. Indeed, the resilience of the private sector in our market economy probably would have been more evident by now had not Washington politics intruded. Uncertainty about fiscal policy last year and the reality of budget consolidation this year places the US currently in the middle of three quarters in which real GDP growth averages about 1 per cent.
Reinhart, along with his famous economist wife Carmen Reinhart, have done a lot of work on post-financial crisis economies, which they say are weak for 3 reasons: household deleveraging, banks cleaning up their balance sheets, and the introduction of new rules and capital regulations imposed by government.
But economies don’t stay weak forever.
In this note, Reinhart shows this chart, which shows that eventually, the post-crisis economic malaise does fade. We’re getting to the point where the impact should be zero, and will still keep improving.
Photo: Morgan Stanley
So overall, Reinhart is consistent with what others are saying.
The deleveraging is coming to an end. The private sector is normalizing. The crisis is over.
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