The “new normal” revisited

In this article I revisit the contention that the western world has entered a “new normal” of sluggish economic growth. It is the final part of my latest Fund Strategy cover story.

In many ways the notion of the low hanging fruit parallels the argument that the global economy has entered a “new normal” of poor growth. In both cases the idea is that the economic future is likely to be less rosy than the past.

The notion of the new normal has several high profile proponents. Mohamed El-Erian and Bill Gross of Pimco both used the term while George Soros talked of a “new paradigm”. Robert Peston, the BBC’s business editor, preferred to label the same idea “new capitalism” while Anatole Kaletsky, an economics commentator for the Times (London) referred to Capitalism 4.0.

Although there were differences in emphasis between each of them in broad terms they identified five key features of the new era:

* Slow economic growth or even stagnation in the developed world.

* Deleveraging. Companies will focus more on reducing their debt than promoting future growth.

* High instability. Financial volatility is likely to be greater than in the past.

* Reregulation. Financial regulation is likely to be tightened up.

* A more pragmatic form of politics.

Although the idea of the new normal covers a broader range of factors than that of the low hanging fruit it is also shower. There are two ways in which Tyler Cowen’s theory is more substantial. First, it traces the declining growth trend back to 1973 rather than seeing it as a response to the latest crisis. Second, it gives a plausible explanation, focused on technology, why growth has slowed.

However, despite some optimistic flourishes, both sets of ideas are fairly pessimistic about the prospects for future growth in the West.

* For more on the new normal argument see “Paradigm lost”, my Fund Strategy cover story of August 30, 2010.