Weak Consumer spending in US will impact world growth

Weak consumer spending will last for years

Ed Harrison at Credit Writedowns about structural fall in consumption patterns for US consumers:


Retail sales in the United States have fallen 10% since peaking in November 2007. Much of this decline represents a permanent fall in consumption by overly indebted American consumers.


The fall in consumption is due to permanent loss of spending capacity of US consumers and their high level of debts. US economy has was contributed about third of global GDP. Close to 70% of US GDP was composed of consumer spending. US consumer spending contributed a significant portion of global GDP. With US consumer spending remaining at low level global growth will subdued for years.


The fall in spending will affect
1. Export based economies
2. Commercial real estate
3. Banking system

Indian economy has to look for new sources of growth in this new era.

High government borrowing hinders rates from going down

Govt borrowing hindering fiscal transmission: RBI


“Government borrowing is so high...In a way it is militating against interest rate coming down,” Subbarao said while releasing a collection of essays authored by C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council. The Union government’s gross market borrowings during 2009-10 is estimated to go up to about Rs 4.51 lakh crore from Rs 3.1 lakh crore during 2008-09.


High government spending is likely to crowd out private investment. At this point though the pace of private investment is not high. High government spending can also lead to inflation down the line. With official inflation in negative territory this may not be one of top concerns. However, once the inflation take off it will be difficult to control.
Budget estimates are also typically on lower side. So one can expect that the net borrowing will be higher than Rs 4.5 lakh crore.