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Managing Liquidity in Today’s Low Rate Environment

by Kathleen Hughes, Head of Global Liquidity Management Sales, and Jason Granet, Head of International Liquidity Portfolio Management for Global Liquidity Management, Goldman Sachs Asset Management

Economic growth appears to have slowed significantly in many parts of the world. What is your outlook for growth over the next 12 months?

We’ve seen ebbs and flows in economic growth since the financial crisis in 2008, but we have yet to see any sustainable run of growth that would set us up for what we could call a typical recovery. In a typical recovery, the economy is going to grow above trend for a period of time and start to reduce the output gap.

In this recovery, every time the economy has started to turn higher, we’ve hit setbacks. In 2010, the first round of the European sovereign crisis contributed to a slowdown that wasn’t technically a double dip, but certainly looked like one in terms of the shape. Growth picked up pace again with the Fed’s second round of quantitative easing, but has slowed once again and markets have been extremely volatile. Events have also contributed to investor concerns about growth. These include the recent debt ceiling debate and rating downgrade in the US, and the spread of volatility in European sovereign debt to countries like Italy and France. Considering this backdrop, we don’t think it’s clear yet what would be the impetus for a reacceleration in growth, and so we think the risk of recession in the US may have increased significantly. In our view, modest economic growth is now probably the best-case scenario.

The European story is also concerning but somewhat different because of the different levels of economic growth among the countries in the Eurozone. Germany has clearly generated some very strong growth and unemployment has fallen to record levels. However, the economic situation in some of the so-called ’peripheral’ countries like Greece, Ireland, Spain, Italy and Portugal has deteriorated over the last two years, raising global concerns about the European banking system. The situation in many of the peripherals and the broader global slowdown appear to be weighing on growth in Germany; the economy grew just 0.1% in the second quarter versus 1.3% in the first quarter. We don’t expect a recession in Germany but we do think growth will be slower and the risks are probably to the downside. The UK is somewhere in the middle between the US and Europe. Europe has a significant influence on UK growth, and so does the US.