Economists worry industrialized world faces a ‘lost decade’

Paris. With momentum sputtering in many countries, economists fear the industrialized world is facing a period of slow growth and high unemployment similar to the “lost decade” endured by Japan in the 1990s.

“The risk is higher than ever,” said Philippe Trainar, a professor of economics at Paris-Dauphine University. “The latest data shows that we were too optimistic about a recovery in the United States and maybe too pessimistic about Europe.”

The bursting of a financial and property market bubble in Japan in the early 1990s pushed what was then the world’s second-largest economy into deflation — a period of sharply declining prices and lower salaries.

Japanese economic growth during the 1990s averaged about 1 percent a year and the country’s economy has now been overtaken by China.

“The Japanese experience shows debt reduction is a very slow process and budgetary and monetary support measures are not enough for speeding up growth,” said Francesco Giavazzi, an economist at Bocconi University in Milan.

US economist Carmen Reinhart from the University of Maryland agreed, saying: “The chances that the United States and the European economies will be on a very slow path for the next decade are extremely high.

“It’s very likely that we will have 7 to 10 years of high unemployment in the United States,” she added.

The main problem, economists say, is a widespread lack of confidence about the future is making households cut down on consumption and save more, especially because many people are heavily indebted.

Consumer demand is therefore not strong enough to restart the country’s flagging economic engine.

There is disagreement among the experts, however, on whether the current stagnation in Europe and the United States could actually lead to deflation, which would further wreak havoc on the global economy.

James Bullard, a member of the United States Federal Reserve’s interest rate-setting panel, has warned that the US economy risks “Japanese-style” stagnation and has cautioned about “the peril” of deflation.

Writing in a Federal Reserve journal, he said the United States was closer to a lost decade “than at any time in recent history.”

In a speech last month, Fed chief Ben Bernanke said the central bank was determined to prevent deflation but said the risk was low.

Persistent economic weakness over the next few months “would likely increase the perceived risk of deflation” and spark counter-measures by the Fed, economists at Goldman Sachs said in a recent research note.

But Giavazzi and Trainar say Western economies are more likely to have a prolonged period of low inflation or disinflation — a lowering in the rate of increase in consumer prices rather than an actual decrease.

Laurence Boone, an analyst at Barclays Capital investment bank, said there was a chance of a “Europeanization of United States growth, meaning weak growth associated with unemployment which would go down only slowly.”

Chris Williamson, chief economist at Markit, a data and research group, said the pervasive fear of a “lost decade” could mean that such an outcome is avoided.

“Policy makers have learned from what happened in Japan. They have reacted much faster to financial market problems,” Williamson said. –Agence France-Presse