I have been suggesting that the U.S. economy would likely be unable to meet current estimates of sustained and robust economic growth of 3% or more due to the global slowdown. Despite ongoing Central Bank interventions, the deflationary pressures in the Eurozone and Japan are likely to flow back to the U.S. sooner rather than later.
Over the weekend, Japan fell into a recession as economic growth and inflation failed to gain traction despite the Bank of Japan’s massive internal stimulus program. This, of course, is really no surprise as Japan has been fighting disinflationary pressures in their country for the last 30 years as shown in the chart below. Japan’s internal struggle with an aging population, lack of savings and accelerating debt/GDP ratios continue to plauge economic prosperity.
While Japan has its specific issues, the Eurozone has now effectively entered into the same “liquidity trap” as the member countries continue to dismiss making the necessary structural reforms to cure their burdensome debt ratios. As shown, the decline rate in economic growth since 2007 shows the real problem, despite fits and starts of activity the Eurozone countries simply cannot generate an economic liftoff.
Furthermore, as I stated previously:
“…the recent surge in the US Dollar will likely suppress demand for exports,particularly with Japan, the Eurozone and China either in or near recessions.When you factor in that exports to our major trading partners comprise roughly 40% of domestic corporate profits, the impact to profitability could be greater than currently anticipated.”
This is an important point as the dollar is not surging due to rapidly increasing economic strength, but rather due to a “flight to safety.” Currently, the U.S. is the “only girl at an all-boy dance” and historically these “flight to safety” rotations have tended to be fairly short lived.
