Whatever the outcome of next year’s presidential election, US public debt is fast approaching levels that could seriously damage future growth prospects, Standard Life Investments has warned.
"After years of living beyond its means, the US economy is in for a period of significantly slower growth," the firm’s senior economist Douglas Roberts said.
"The outcome of the 2012 elections could help define just how serious an attempt is made to rein in the deficit, but unfortunately, the checks and balances of the US political set-up are more likely to see a continuation of the present logjam," Roberts said.
In latest edition of Global Perspectives the UK-based investment house examined the debt burden facing the US in light of the 5 August downgrade to its credit rating.
"Given estimates about what needs to happen to spending and taxes just to stabilise the debt/GDP ratio, both private and public spending trends will be much less robust going forward," Roberts said. However, if politicians fail to take action immediately to deal with the situation, he said, "it will be damaging levels of debt that will hinder economic expansion".
Roberts said the rise in debt has convinced some to dub the economic outlook the ‘new normal’, in which the economy would grow by an even lower rate of 1-2 per cent rather than 2-3 per cent per year. This view also expects high unemployment to be the new norm.
If US political parties continue to be locked in a stalemate, Roberts said there could be a return of the "bond vigilantes". These so-called vigilantes would be bond investors who oppose government policies they see as inflationary by selling bonds and driving yields up, he explained.
Whatever way the US deficit correction comes about, it will happen, Roberts said. "The problem is knowing when," he added. Levels of debt over 90 per cent of gross domestic product are relatively rare and cannot continue forever, he said.
