If it wasn't clear before, it is now: There is no easy way back to the heady economic growth the world got used to in the years preceding the financial crisis.
The world's finest economic minds ended their annual retreat among the mountains and streams of Wyoming's Grand Teton National Park notably anxious about the months ahead. Many of the more than 40 central bankers who convened for the Federal Reserve Bank of Kansas City's symposium in Jackson Hole have pushed their knowledge of monetary policy to the limit, and still the recovery lacks vigour.
To be sure, most official forecasts are for tepid growth well into 2012. Households, especially in the United States, are rebuilding savings, companies are reluctant to invest and rehire amid so much uncertainty and banks are stricter about handing out loans. Still, financial markets suggest investors are having difficulty adjusting to this new reality. Stock prices in the U.S. have slumped for three weeks in a row as a run of poor data showed predictions of a difficult climb out of the hole created by the financial crisis were on target.
"We've got to readjust our sights" to slower growth and higher unemployment, Vincent Reinhart, a scholar at the Washington-based American Enterprise Institute and a former Fed economist, told Bloomberg Television at the conference, which has so risen in prominence that Jackson Hole now is to the economics profession what Cannes and its film festival is to the movie industry.
Mr. Reinhart's view is based on a quantitative analysis of severe financial crises since the Second World War that he did with his wife, Carmen Reinhart, a University of Maryland economist. The Reinharts' research, unveiled at Jackson Hole, found that the ratio of credit to gross domestic product rose to about 38 per cent over the decade ahead of the financial crises studied, and declined by the same amount as households rebuilt their savings. This process is long: about seven years, according to the Reinharts. The result in every case is what the U.S. economy and others are struggling with now: elevated unemployment and restrained economic expansion.
Economists call the desire - or need - to devote incomes and profits to paying off debt "deleveraging." Get used to the word because it "is going to be a drag for a considerable time," William White, a Canadian economist at the Organization for Economic Co-operation and Development, warned on the weekend.
There is no doubt the recovery, especially in the U.S., is losing momentum. Government figures published Friday showed GDP advanced at an annual rate of 1.6 per cent in the second quarter, compared with a previous estimate of 2.4 per cent. Recent indictors show that housing sales collapsed in the spring with the end of a government incentive for first-time buyers. The unemployment rate, which will be updated on Friday, is at 9.5 per cent and U.S. exporters are struggling to find new markets, resulting in a wider trade deficit. Economists at HSBC last week lowered their forecast for U.S. economic growth this year to 2.8 per cent from 3.1 per cent.
That's a better scenario than was facing central bankers when they met in Jackson Hole in 2008, weeks before the failure of Lehman Brothers. But while last year's symposium provided an opportunity for policy makers to catch their breaths and even partake in quiet self-congratulation, the 2010 event struggled to shake a persistent gloom. Martin Feldstein, who sits on the committee of economists that dates U.S. business cycles, put the odds of a renewed recession at one in three. Nouriel Roubini, the New York University professor who predicted the financial crisis more than a year before the collapse, said on the eve the Jackson Hole gathering that there was a 40 per cent chance the U.S. will slide back into recession.
Such negativity put the central bankers at Jackson Hole in the position of having to draw the distinction between growth and collapse. The heads of the Mexican and Swedish central banks said in separate interviews that their economies were doing a little better than they had expected. Federal Reserve chairman Ben Bernanke used his speech at the beginning of Friday's session to affirm that the "preconditions" for decent growth in 2011 are in place, even though the second half of 2010 was going to be slower than he had forecast. One of the reasons the economy could be poised for a rebound is that new evidence shows that household deleveraging is happening faster than economists at the Fed had realized, Mr. Bernanke said; as a result, consumption could pick up sooner than expected.
But Mr. Bernanke and other policy makers made clear that they aren't crossing their fingers and hoping for the best. The Fed chief used his speech to emphasize that he is prepared to provide more stimulus if it begins to look like economists such as Mr. Roubini are again prescient. Bank of England deputy governor Charles Bean acknowledged that more stimulus may yet be necessary to get the economy back to a more normal setting.
It's just that normal, for now, doesn't mean what it used to, suggested John Lipsky, the first deputy managing director at the International Monetary Fund. "The base case remains most likely the continuation a moderate recovery," Mr. Lipsky told Reuters, before adding, "emphasis on moderate."