The US financial crisis still casts a long shadow - Westpac

Richard Franulovich, an economist at Westpac, says It's almost a decade since the US financial crisis and growth is still tracking historical analogues pointing to sub-par growth. He further adds that Trump is a potential game-changer, and this week's US House vote on a new health care bill will be a key test.

Key quotes

"The slides below show US growth and interest rates in the decade since the financial crisis vis-à-vis other economies that experienced similar financial crises. In the early years after the US financial crisis many commentators - us included - drew attention to these historical analogues. The key conclusions were that a financial/banking crisis results in a deeper downturn than a “typical recession” and that growth tends to be weak for a protracted period in the recovery phase."

"It is now almost a decade since the US financial crisis. Historical analogues from other financial crisis economies suggest that at this point there is still no discernible improvement in trend growth (see slide). Interest rates tell a similar story, historical analogues suggesting 10 year nominal yields continue to trend lower ten years down the road. These conclusions hold regardless whether one focuses on just the “Big 5” post-war advanced economy financial crises - Sweden (1991), Norway (1987), Finland (1991), Japan (1992) and Spain (1977) - or a larger sub-sample that includes an additional 10 lesser but still significant dislocations (i.e. the US S&L crisis in the 1980s and Australia in 1989). How does US growth, almost a decade since the crisis compare? US growth is tracking right about where the post-crisis historical record suggests it should be, though interest rates are higher (see charts)."

"Of course President Trump’s policy agenda - significant tax cuts, tax reforms, a big lift in infrastructure spending and deregulation – are potential “game changers” that could see the US defy the trend of extended weak post-crisis growth, especially if the focus is on boosting productivity and supply side potential."

"But, any signs that the Trump administration cannot achieve some of these core policy goals could undermine animal spirits and the still weak underlying post-crisis “soft growth” trend could reassert itself."