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Why Deleveraging Is The True Culprit Weighing On Global Growth

Fears over “secular stagnation” appear to be overdone.

Nikolaj Schmidt, Chief International Economist
T. Rowe Price,  Investment Insights, 6 February 2020

Persistent low and negative interest rates have prompted fears that the global economy has entered a period of chronic weak demand, famously described by former U.S. Treasury Secretary Larry Summers as “secular stagnation.” It is easy to see why people are concerned: Since the 2007–2008 global financial crisis (GFC), monetary policy has been continuously loosened to prop up growth—with disappointing results. The proximity of policy rates to the lower bound also means there is little policy space should we encounter a negative demand shock, leaving central banks with a major headache.

I do not believe that the primary cause of the sluggish growth over the past decade is secular stagnation. Rather, the unprecedented low rates of recent years are, in my view, the product of a protracted deleveraging process that is likely to reverse at some point. As such, I think that the global economy is probably in better shape than the proponents of secular stagnation would have us believe.


The Four Phases of Postcrisis Deleveraging

The deleveraging since the GFC has come in four phases: the acute phase of the financial crisis, which kicked off the deleveraging of the U.S. balance sheets; the eurozone sovereign crisis, which started the deleveraging process in Europe; the taper tantrum, which mainly affected ex China emerging market countries; and most recent, the deleveraging of the Chinese economy. These phases of deleveraging have applied a series of powerful brakes to the global economy, one after the other, over the past 11 years. Typically, postcrisis periods of deleveraging last for a few years; the longevity and breadth of the current one shows the extent to which macro imbalances accumulated before, and during, the GFC.


...the unprecedented low rates of recent years are, in my view, the product of a protracted deleveraging process...


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