What is the new normal?

- Quantifying normal "The ‘new normal’ has become an established economic concept, reflecting the widely-shared view that global growth and asset returns will be lower for an extended period of time relative to the history preceding the financial crisis. However, there have been few studies that have tried to quantify the ‘new normal’. This note fills that gap."
- New global trend growth is 3%, not 4% "Our model-based estimates suggest that global growth will average 3% over the next decade, about a percentage point slower than in the previous decade. This outcome is both supply- and demand-side driven. Weaker trend growth will be the by-product of slower world population growth and ageing workforces. But it is also the result of continued de-leveraging and weaker productivity growth in many developed economies. Tighter financial market regulation and the associated impact on the cost of capital may also restrain potential output growth."
- Market divergence "In some ways the ‘new normal’ won’t be so new—divergent trend growth between emerging and advanced economies will endure. Emerging Asia and the Middle East are likely to be the fastest growing regions of the world economy over the next ten years. India, China, and Vietnam enjoy the best longer-term growth prospects in Asia, while Qatar, Egypt and Saudi Arabia lead the pack in the Middle East. Still, Asia will slow somewhat in the next decade, whereas the Middle East has the potential to accelerate. Latin America may also do better in the coming decade."
- The risks "Of course, nothing is assured. Downside risks range from the possibility of more severe sovereign debt crises, heighted protectionism, more restrictive financial market regulation, or a hard landing in China. On the other hand, to the extent that advanced economies undertake structural adjustments to mitigate the impact of ageing populations or boost investment in productivity-enhancing endeavours, faster trend growth relative to our base case is possible."
- Implications "Overall, our estimates suggest that consensus forecasts for trend growth are too high. If investors have to adjust downward trend earnings estimates, valuation multiples are unlikely to expand, even from relatively compressed levels. Finally, on our numbers for trend growth in developed economies, long-bond yields of around 3% do not look particularly out of step."

UBS Tectonic Economics 20100903

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