Source: The Canadian Press

Are we headed into a Japan-style lost decade?

Any question of advanced economies succumbing to the kind of prolonged economic slump that Japan endured in the 1990s would have sounded alarmist only six months ago when Canada, the U.S. and parts of Europe were enjoying strong rebounds from recession.

But recent downward dips in growth, combined with the failure of policymakers to plot a clear path out of the muddle — the latest example being a lack of any action at this week’s G20 meeting in South Korea — have left many analysts fearing the underlying problems may be too difficult to tackle effectively.

Economic bears, such as Carl Weinberg of U.S.-based High Frequency Economics, were quick to pounce on the G20 countries — which include Canada, the United States, Japan and other G7 countries as well as China, Brazil, India and other emerging economic powers — for failing to address the structural flaws in the global economy, particularly currency manipulation and trade imbalances.

“Overall, this summit yielded no results on anything, and it was a waste of time and money,” Weinberg said Friday.

Economist David Rosenberg, of the Toronto-based Gluskin Sheff wealth management firm, said the recent congressional elections in the U.S. has left that government impotent, not a good recipe for bold action on taxes and deficits.

But even some non-bears are also taking gloomy view of governments’ ability to address issues such as the European debt crisis, global imbalances, currency wars and the U.S. housing crisis.

The growing consensus is that by slashing interest rates and pumping up spending, global central bankers and governments arrested the economic slide that began in the fall of 2008 but the structural problems are re-emerging, now that the limits of stimulus have been reached.

In a new paper, TD Bank economists say the U.S. faces a lost-decade of slow growth, similar if somewhat milder to what Japan experienced in the 1990s, unless policymakers can figure out how to fix the housing mess.

Canada is a spectator to many of these developments, although that does not mean it won’t be affected by slow or stagnant U.S. growth.

The Achilles heel in the U.S. economy remains housing and it’s impact on financial markets, says the TD Bank.

Now three years after the collapse, the U.S. housing is still at or near record lows in starts and prices, as well as facing a mortgage crisis with 4.6% of loans in foreclosure, and another 4.5% three months past due.

A recent report found that one-third of mortgage holders have less than 10% of equity in their homes, making them vulnerable to further price drops.

The asset shock on U.S. households is not only restraining consumers from spending, and weighing down financial institutions with bad loans, but also limiting labour mobility since people who can’t sell their homes can’t move.

“If the U.S. wants to avoid a Japan-like experience of very slow economic growth, it’s absolutely essential they deal with this problem. The challenge is that there aren’t any simple policy options out there,” says TD chief economist Craig Alexander.

Similarly there’s now easy answer to global trade imbalances between countries.

The G20 essentially punted the problem this week for a later date, but Alexander says the summit leaders also didn’t prepare the public for the reality that it will take decades to unwind imbalances that took decades to form.

“There is no magic wand to make them disappear,” he said.

Alexander sees U.S. growth as hovering between one and 2.5% for an extended period of time, and unemployment remaining high.

The Fed’s response to such an outlook was the recent injection of US$600 billion into the economy through a purchase of additional treasury bills, but many analysts see this as a bandage, at best providing short-term relief.

Still any growth-initiative for the U.S. is good for Canada, and both Bank of Canada governor Mark Carney and Prime Minister Stephen Harper backed the move even if it helps boost the Canadian dollar.

Analysts caution it was always unrealistic to expect economies to come out of the 2008-2009 crisis as smoothly and quickly as recent past recessions.

Unlike downturns of the early 1980s and 1990s, the recent slump was not a function of the business cycle but of a collapse in financial markets and years of excess spending. Time may be the best and only medicine available, they say.

Bank of Montreal economist Douglas Porter has an outlook that’s less dark, noting that U.S. consumers still show some resilience. But he too sees at best modest growth ahead.

“If we’re expecting the U.S. unemployment rate to suddenly tumble next year, that’s not going to happen. And if we’re looking for sudden export growth for Canada, that’s not going happen either,” Porter explained.

“It’s just that the recovery is likely to be on the disappointing side.”