The US Has to Find New Ways to Grow the Economy: Stephen Roach

With the U.S. GDP declining by an annual 1% in the first quarter of 2014, and the IMF recently cutting its growth forecast for the country’s GDP to 2.0% from the previous 2.8%, economists became more concerned about finding ways to boost the economy. In a recent intervention on CNBC, Stephen Roach, a senior fellow at the Yale University provided his insight on the economy and consumers, stating that amid the around 1.25% average growth in the past six years, which represents a “sluggish growth,” there is a need to find new ways to grow the economy. Roach also said that 70% of the economy is not growing the way it used to.
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“Income is weak. Forget income inequality. Income, in general, is weak. Job growth is slow,”

Roach considers that a big problem is the fact that the U.S. is not producing enough internal income. The policies such as the Fed boosting the asset markets in order to make the consumers to spend through wealth effects are not “getting attractions.”

“If I were King? I’d look at the problem. We’ve got a balance sheet problem. Let’s put in place policies that would enable people to pay down debt more quickly and rebuild savings so that they feel more secure about their long-term prospects for financial security,” Roach added.

Regarding the investments in the private sector, Roach stated that companies are concerned about the slow demand growth. In this way, if the demand is not growing quick enough firms do not have the incentive to increase their capacities or to hire new workers. In this way, if demand picks up, than the investment will “kick in big time” because companies have a lot of cash flow on their corporate balance sheets.

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As we have reported, the IMF reduced its 2014 growth forecast for the U.S. economy to 2% from to 2.8%. However, as Christine Lagarde mentioned in an interview with Bloomberg, this reduction should not be viewed as a sign of a downward spiral, which is also confirmed by the IMF’s 3% growth outlook for the next year.

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