Vanguard experts discuss factors that could contribute to slower growthIn this video, Global Chief Economist Joe Davis, Senior Economist Roger Aliaga-Díaz, and Global Head of Vanguard Quantitative Equity Group John Ameriks discuss what factors may contribute to slower periods of economic growth and how those issues could affect the markets in coming months.
TRANSCRIPTVanguard Perspectives® Noni Robinson: So, Roger, you’ve said that investors should expect some ‘growth scares’ over certain economies over the near term. Can you explain what you mean by that?
Roger Aliaga-Díaz: Yeah, sure, Noni, what we’re trying to do with the term growth scares is really to differentiate from the more extreme case of a recession. So, as we’ve been discussing here, I mean, the probability of recession is perhaps not as high as some markets seem to indicate. Economic fundamentals show basically that the economy is on solid footing, but that does not prevent that the natural volatility of the data to be, basically, periods in which things kind of slow down a little bit. So a slowdown is very likely. One, because the economy’s growing at a rate that is much more moderate, much more modest compared to historical levels. And when you are growing at a much lower level, any normal volatility to the data would basically give you the sense that things are slowing down. So, sub-1% growth, growth in GDP below 1%, is more normal now than it used to be, and that’s just a natural aspect. The other thing is that the economy is trying to find its footing in terms of the long-term trend. The economy is converging to this long-term trend, which is about 2%, and in this slowdown, we may see a little bit of numbers that may surprise the markets. As an example, we don’t see 200,000 jobs a month going forward indefinitely as something that is sustainable. We may see payroll drops, payroll numbers slowing down a little bit. And, that, again, when it hits the headlines, it will feel like a growth scare. But our key message is that that does not mean that the economic fundamentals are weakening in a fundamental way.
John Ameriks: I was going to ask you guys. I mean, do you guys see the situation globally impacting growth scares that we might have in the U.S.? I mean, a lot has been made of the U.S. being the engine of growth. And if we don’t start to see some reflection of that outside of the U.S., does that cause issues for us?
Joe Davis: I think the one thing, which Roger has touched upon in the past, our main hypothesis, John, is that the U.S. economy was going to remain resilient in the face of overseas volatility and weakness. Now, that said, we’re not complacent, and it’s not immune. And I think some of the deterioration in the financial conditions—weak equity market, commodity markets in December and January—I think are going to leave a sort of soft imprint on the U.S. economy if historical relationships are any guide, which may be cause for concern for some for a period of time. And I think we should be prepared for that going forward. I mean, China policy decisions over the past year have led to spikes in volatility, [in] commodity markets, as you well know. And there can be something out of Europe with Brexit [British exit from the EU] or so forth. So with those spikes, if they get to a certain level at least, it can lead to a pause in investment and hiring decisions and then, that can lead to, at least a slowdown that you see with a lag in the economic data. We’re prepared for that given what we saw in December and January, and I think we [it] should be reasonable to expect that going [forward], at some point in 2016, 2017, given future spikes in volatility. I just don’t know what necessarily would be the catalyst.
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