A ‘policy-induced slowdown’

at 10:45 AM ET, 08/18/2011

The markets are tanking. Again. And it’s in part because they expect us to screw up. Again.

That, at least, is what J.P. Morgan is saying. Part of what’s driving the market down is that the company announced that it was cutting its global growth forecasts by a full percentage point for 2011 and 2012. Why? I'll let them explain:

There are three main reasons for our downgrade. First, the recent incoming data, especially in the US and the euro area, have been disappointing, suggesting less momentum into 2H11 and pushing down full-year 2011 estimates. Second, recent policy errors – especially Europe’s slow and insufficient response to the sovereign crisis and the drama around lifting the US debt ceiling – have weighed down on financial markets and eroded business and consumer confidence. A negative feedback loop between weak growth and soggy asset markets now appears to be in the making in Europe and the US. This should be aggravated by the prospect of fiscal tightening in the US and Europe.

In other words: Growth is weak and policymakers are hurting rather than helping. The debt-ceiling debate hurt. The dithering response to the euro zone’s debt crisis hurt. And the expected austerity in both the United States and Europe is going to hurt even more. J.P. Morgan notes that one reason they think the United States might tip back into recession is that in the first quarter of 2012, there will be “an automatic tightening fiscal policy if, as our US team currently assumes, this year’s fiscal stimulus measures will expire.”

What we are entering, J.P. Morgan says, is a “policy-induced slowdown.” Another way of saying that is we’re entering an unnecessary slowdown. This implies that if we reversed course, we could see a policy-induced recovery, or at least acceleration. So how about it, Congress?

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