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Structural Economic Problems May Push Growth Below 2 Percent

Structural economic headwinds might cause the rate of economic expansion to drop below 2 percent in the United States and other nations, according to bond fund manager Bill Gross.

Economic Headwinds 

Gross, whose Pacific Investment Management Co. operates the largest bond fund in the world, elaborated on the currently-existing economic headwinds in his monthly investment outlook. He stated that policymakers may be in for a challenge, as they may not have solutions that act like a miracle and remedy the poison left by previous times.

He referenced a speech recently delivered by Federal Reserve Chairman Ben Bernanke, in which the central bank head predicted that U.S. growth in gross domestic product would be decreased "at least for a time."

The document released by Gross predicted that the 2 percent rate of growth in GDP recently confirmed by Bernanke could be reduced even more by the economic structural headwinds.

Leverage 

Leverage is a factor that has been cited by many market experts as having a contractionary effect on the economy. Gross suggested that many developed nations currently have too much debt on their balance sheets, as working off this obligation will put downward pressure on economic expansion for years.

He said that although certain countries use a plan to eliminate this debt bit by bit, the eurozone outlook illustrates that this strategy is ineffective in many cases. He said that most of the member nations are afflicted with either recession or depression.

Gross noted that not only are many countries severely indebted, but that many households and financial institutions have these same burdens. Individuals will need to increase their savings rate, and financial firms need to generate more earnings. He emphasized that the increased savings provide a long term solution to paying off this debt, but the deleveraging activity serves as a drag on economic activity in the short term.

Gross emphasized the time that could be required to pay off this debt, stating that "the biblical metaphor of seven years of fat leading to seven years of lean may be quite apropos in the current case with the observation that the developed world’s growth binge has been decades in the making."

Globalization 

Globalization has provided the worldwide economy with an accelerant in the past, but it could detract from economic expansion in the future. Gross notes that between China becoming capitalistic once again and the Iron Curtain falling, adding billions of market participants into the global marketplace.

The increased number of potential workers helped many major corporations to boost their profitability, frequently at the expense of jobs and compensation in developed economies. The benefits created from globalization are starting to decrease, which is causing worldwide economic growth to slow.

Gross said that China's policy announcements do as much to move asset markets as similar declarations that come from the United States and Europe. He predicted that if the nation's expansion decelerated, it could adversely impact the economic growth of the countries.

China's economy has suffered economic growth that slowed down for seven consecutive quarters.

New Normal  

Gross recently stated that investments will experience lower returns in the coming years as a result of the 'new normal' that includes widespread joblessness, deleveraging after the recent financial crisis and stunted economic growth. The bond fund manager recently predicted that bonds will generate returns between 3 and 4 percent, and stocks will produce returns that are a few points higher.

How will you be prepared in the event that the global economy experiences sustained weakness? 

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