Bernanke Expects Slow Recovery, Calls for Fiscal Balance

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In contrast to the optimistic assumptions of the Obama administration, Ben Bernanke said economic recovery could be slow as businesses will be cautious about hiring even as broader growth resumes. The Federal Reserve Chairman also said more emphasis needs to be put on restoring fiscal balance.

“Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further,” Bernanke said in testimony to the House Budget Committee on Wednesday.

“We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly,” he added.

In March, the Obama administration said it was anticipating GDP to grow by 3.2% in 2010, and as much as 4.6% in 2012.

Bernanke then switched gears to voice his concern for the growing fiscal deficit, which is set to reach nearly $2 trillion this year, and then grow an additional $1.3 trillion in 2010. 

“These developments would leave the debt-to-GDP ratio at its highest level since the early 1950s, the years following the massive debt buildup during World War II,” Bernanke said.

He added, “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.”

His testimony was not all gloom-and-doom, however, thanks mainly to the housing market, which Bernanke said “has shown some signs of bottoming.”

“Sales of existing homes have been fairly stable since late last year, and sales of new homes seem to have flattened out in the past couple of monthly readings, though both remain at depressed levels,” he said. “Meanwhile, construction of new homes has been sufficiently restrained to allow the backlog of unsold new homes to decline--a precondition for any recovery in homebuilding.”

Overall, the economy continues to contract, but the pace is beginning to slow down, Bernanke said, reiterating that growth would resume at the end of this year.