The economic outlook for the United States remains modest for the long-term, as the “era of grand gestures of stimulus spending is over”, according to Eric Lascelles, chief economist for RBC Global Asset Management Inc.
“Expect slower GDP growth over the long term, with fiscal restraints going to be a drag for the next few years,” said Lascelles, who spoke at the 2011 Segregated Funds Annual Conference hosted by the Canadian Life and Health Insurance Association held in Toronto.
The U.S. government has called for modest GDP growth of 2% over the next year, Lascelles added.
The government will pull back its fiscal stimulus spending as it puts a “laser-like focus” on the unemployment rate, said Lascelles, which is currently hovering at 9%. With the housing market going bust and the residential construction sector shrinking, many construction jobs have been cut.
Before the 2008 financial crisis, the government’s aim for unemployment would have 5%, but that’s no longer the case, added Lascelles: “It’s no longer feasible…The new normal for unemployment is 6.5%…the U.S. is several million jobs below where it wants to be.”
The government will also be focusing on improving the collapsed housing market through its Troubled Asset Relief Program, an initiative aimed at buying mortgage back securities from financial institutions to relieve pressure in the housing market.
The U.S. banking sector will continue to incur ongoing regulatory reform costs, added Lascelles, with regulators tightening the belt on market conduct and supervision. With the capital needs of bank uncertain in the near term, it’s likely lending will be reduced, which will further add to the decrease in economic growth.
As lending has tightened, consumer spending has also followed suit, added Lascelles.
“Before the downturn, consumers were spending more than the income they were earning,” said Lascelles. “For the first time in a decade, spending growth is now slower than income growth.”
While Standard and Poor’s downgraded the rating on the U.S. government’s long-term debt in August from “AA+” from “AAA”, Lascelles said the downgrade does not reflect the U.S.’s financial stability.
“The downgrade was about political dysfunction,” said Lascelles. “The consequences of the downgrade are limited…since the U.S. still has the best prospects for growth.”
Emerging markets such as China are in “astonishing shape” added Lascelles, with Africa poised to become the next best source of cheap labour.