Stephen King: US downgrade just confirms what we already know – its economy is in a mess

http://www.independent.co.uk/news/business/comment/stephen-king/stephen-king-us-downgrade-just-confirms-what-we-already-know-ndash-its-economy-is-in-a-mess-2333633.html

Economic Outlook: The US budgetary position is a mess – in much the same way that the Pope is Catholic and bears do their business in the woods. The downgrade by S&P, the ratings agency, merely confirms what everyone already knew. The symbolism, however, is mightily important.

The debate about the debt ceiling may have grabbed most of the headlines in recent weeks but the fiscal rot set in many years ago. Even before the financial crisis, the fiscal path was unsustainable: an ageing population combined with extravagant social security commitments suggested either the need for massive tax increases or draconian spending cuts.

The crisis, however, made matters a lot worse. According to the OECD, the US budget deficit jumped from 2.9% of GDP in 2007 to 10.6% in 2010. Excluding debt interest payments and adjusting for the economic cycle, the so-called "primary" deficit rose from 1.5% to 7.0% of GDP, the biggest in the world. And the ratio of debt to GDP jumped from 62.0% to 93.6% of GDP. The eurozone is nothing like as bad: an average deficit of 6.0% of GDP, a primary deficit of 1.1% of GDP and a debt/GDP ratio about the same as America's but rising nowhere near as quickly.

Part of America's problem relates to the absence of decent economic growth. Particularly in the light of recent data revisions, we can now safely say that the US has just been through both the deepest recession in the postwar period and, importantly, the shallowest subsequent recovery. GDP is far lower than was assumed pre-crisis, unemployment is far higher and, despite massive monetary and fiscal policy stimulus, financial markets now fear a double-dip. The much vaunted "bounceback-ability" of the US economy is no more. And with future growth more likely to average 2% – in line with the average of the last economic cycle – rather than the 3% conveniently assumed by the Congressional Budget Office, the fiscal arithmetic will remain under intense pressure.