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US economic growth to disappoint, says Legal & General

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Legal & General Investment Management economist Tim Drayson believes the recovery underway in the world’s largest economy is fragile and that US growth over the next decade is likely to disappoint investors.

Speaking at a LGIM Fundamentals briefing, Drayson (pictured) said people should not be complacent about the strength of the recovery.

While employment growth is likely to improve over the coming months, this cyclical improvement may not last long. 

“Over the longer-term, a lack of domestic saving, excessive reliance on overseas borrowing and chronic fiscal deficits threaten to undermine the recovery,” he said.

Many market participants believe the private sector has now laid the foundation for a sustained economic expansion. However, Drayson said while it is true that the private sector has moved from a position of heavy borrowing to a significant financial surplus, the major flaw in this line of argument is that it ignores the source of this cash.

“In an effort to stabilise the economy, the US government has pumped huge sums of money into the private sector. This protected household disposable income and cushioned consumer spending while at the same time allowing the corporate sector to cut costs.” 

Drayson explained that while action taken by government has stabilised the private sector, it has only served to transfer the debt problem from one sector into another.  The US now has a huge budget deficit issue and the state of public finances remains unstable.

This issue is not unique to the US. Drayson warned that both US and the UK (along with much of the developed world) debt levels will have to be brought under control within the next five to ten years to address the longer-term pressures from deteriorating demographics and rising healthcare costs.

“To address this debt, the US government will have to reduce spending and increase taxes. While this may keep unemployment high for a few years, it will also allow the economy to gradually rebalance. This would ultimately set the stage for a more durable economic expansion. If they fail to address the budget deficit and allow the economy to grow faster, the US risks a widening current-account deficit which could undermine confidence in the US economy from the rest of the world. This would risk a crisis in the US dollar and the US bond market,” said Drayson.

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