Which macroeconomic equilibrium in the United States and the euro zone?

- "We try to characterise the macroeconomic equilibrium over the next few years in the United States and the euro zone. After the crisis, we are likely to see:
• a significant need for household deleveraging due to the persistent imbalances in their balance sheets, leading to sluggish household demand;
• a reduction in fiscal deficits;
• need for companies that want to reduce their debt leverage to increase their profitability via a squeezing of wage costs instead of via rapid growth in their turnover; accordingly, distortion of income sharing at the expense of wage earners, which will reinforce the weakness of household demand and boost company earnings. The resulting effects on stock markets will be ambiguous;
• the main source of growth is therefore likely to be exports and related investments;
• due to the weakness of domestic demand and the distortion of income sharing at the expense of wage earners, domestic inflation will remain very low, and monetary policy will hence remain expansionary. This points to low risk-free nominal interest rates;
• the international environment can be expected to move in the same direction for several years: high level of global savings, rise in commodity prices deferred for several years by the crisis, and low inflation given the labour reserves in emerging countries. Emerging countries will probably not become inflationary or stop generating excess savings before the end of the decade."
- "All in all, we expect an under-employment equilibrium (Keynesian unemployment equilibrium) in the United States and the euro zone for a few years, with fiscal policy becoming more restrictive and monetary policy remaining expansionary, resulting in the normal characteristics of such an equilibrium: unemployment, lack of inflation and low interest rates. The distortion of income sharing will shift the burden to wage earners, while corporate profitability will be robust despite tepid growth."

Natixis Flash Economics 396 20100809

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