The economy still has "major imbalances to unwind," which will act as a drag on growth for the foreseeable future, says Craig Alexander, senior vice president and chief economist with TD Bank Group.
Alexander spoke with AdvisorOne in an exclusive interview following his lunchtime keynote address to attendees at TD Ameritrade's annual conference on Friday in Orlando.
"In 2009, we experienced the most synchronous global recession of all time," Alexander says. "In the middle of 2009 there were signs the tide had turned and we experienced global growth in 2010. In 2011, the possibility of a renewed downturn surfaced, but I believe it was overblown. Growth has continued in 2012, but it's slow and has been frustrating for investors."
The reason for such a lax recovery is what Alexander refers to as "major market imbalances," the first of which is the cheap credit that fueled the real estate bubble. The second imbalance is the fact that, traditionally, once a bubble deflates, a period of "purging" occurs where bad bets unwind, something that didn't happen after the technology bubble burst early in the last decade. And the last imbalance was the result of flawed thinking surrounding the concept "great moderation."
"In the middle of the last decade, we had a sustained period of low inflation, which led to a sustained period of low interest rates," Alexander explains. "The theory was this would lead to longer business cycles and relatively shallow downturns and the economy could be goosed with monetary policy. But it didn't happen. Risk continued to grow and the result was 2008, in which we came very close to a depression."
It takes time to unwind the imbalances, which is the reason for the slow recovery. Further complicating matters is the fact that imbalances created by policy responses to the crisis must now also be unwound.
"The crisis has revealed structural weaknesses in the system," he says. "For instance the euro zone had a common monetary policy, but not a common fiscal policy, which has exacerbated the problem."
Emerging markets, he adds, didn't have the imbalances of the developed world, so their economies "took off" after cash injections from their central banks. China was one such emerging market, which is now headed for what Alexander refers to as a "soft landing." If growth falls below 8%, he believes that China will slip into recession. It is currently at 8.2%, and he believes the government is taking the necessary steps to ensure growth remains above that threshold.
Japan experienced a contraction last year due to "mother nature"; the earthquake and resulting tsunami and nuclear crisis.
