Douglas Roberts, chief international economist at Standard Life Investments, outlines the options available to policymakers in a slow growth environment.

The global economic recovery from the great recession of 2008 is fast losing momentum, and there is a growing fear that the authorities are relatively powerless to turn things around.

In the developed economies there is little monetary firepower left, while the fiscal alternative is severely constrained by already dangerously-high levels of public debt.

In the emerging economies high levels of inflation and a debt hangover from the 2008/09 stimulus packages limit their policy options. Is there really nothing that can be done?

New Normal

One thing that must be recognised is that the next ten years are going to be very different from the first decade of the 21st century, when households and governments lived well beyond their means.

Debt levels soared, encouraged by the availability of historically low levels of interest rates. That period of risk appetite has now given way to a period of risk aversion as lenders are more concerned with capital preservation and borrowers are keen to get their debts back to more manageable levels.

In this economic environment economic growth is likely to be slower than we have been used to, and that means fewer employment opportunities.

So it may well be the case that governments are unable to deliver on their growth and employment objectives using the traditional tools of fiscal and monetary policies.

The other attendant problem of slower trend rates of growth is that it will take less of a disturbance to tip economies back into recession, especially in a world where there are heightened global inter-relationships.

It will take good judgement and luck to deliver steady economic growth and, with a narrower margin for error, there will be an increased risk of policy error.

A more varied array of policy options could well help to support economic growth in the years ahead.

What are the options? What can policymakers do in present circumstances when the scope for monetary and fiscal initiatives is so limited? The good news is that there are a variety of other ways in which the authorities can assist the economy.

Removal of uncertainties

Economic players, be they households, businessmen or investors, abhor uncertainty. It makes decision-making imprecise and encourages inaction.

In the US, for example, one of the main reasons that businesses are not hiring, or investing, as much as they could be is due to uncertainty.

Just how does the US government intend to rein in public debt to more manageable levels? A clearer idea of an intended policy timetable, with the likely split between spending cuts and tax changes, would help lift the fog.

The information may not be what business wants to hear, but at least it would remove some uncertainty and facilitate decision making.

In Europe, the politicians have not yet set out a clear roadmap about how they plan to solve the sovereign debt crisis. For the present, they cannot even agree on setting up the processes to ‘contain’ the problem, let alone solve it.