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What Causes Slow Economic Growth?

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  • Written By: Kristie Lorette
  • Edited By: O. Wallace
  • Last Modified Date: 02 September 2016
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Slow economic growth is caused as a reactionary step that consumers, businesses, organizations and even governments take in response to what is happening in the economy. Some of the causes of slower than normal economic growth are the government spending more than they’re lending, a lack of confidence in the economy by consumers, declining housing prices and consumers who are saving more than they are spending.

One of the primary causes of slow economic growth is when the country and the economy is trying to expand and grow, but the government is not allowing the money to flow into the economy enough to spur the growth. In the US, when the Federal Reserve and the Federal Open Monetary Committee (FOMC) pulls money in from circulation, it is instituting a restrictive monetary policy.

Lagging economic growth is also a result of a lack of consumer confidence in the economy. When employment rates are high, interest rates are high or consumers fear the economy is facing inflation, it causes them to stop doing the things they normally do. This includes depositing money into the banks, buying cars or making big-ticket item purchases that spur the economy.

It is not just consumer confidence that affects the economy. Businesses and other types of organizations also cut back their spending which causes slow economic growth.

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Declining housing prices are another cause of slow economic growth. The buying and selling of homes has one of the biggest effects on the US economy. When someone buys a house, not only does it pump money into the seller’s bank account, but it also puts money in the real estate agent’s account, the appraiser’s account, the lender’s account and other home related service business accounts. When homeowners are not able to sell their houses, it brings all of these depositing activities to a screeching halt.

Consumers and businesses also tend to be like squirrels when there is a lack of confidence in what is happening in the economy. This causes them to cut back their spending, stop eating out, stop spending money on anything that is not a necessity. Without this money flowing through the businesses that consumers and businesses patronize, then it is also prohibits the money from reaching the general economy. Again, this will cause slow economic growth.

Some consumers even turn to keeping their cash at home instead of depositing in their bank accounts for fear that the banks will fail. Again, this takes money out of circulation that the bank would normally loan out to spur economic growth, so instead is slows down the growth of the economy.

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Discuss this Article

fify
Post 3

I think it's wrong to put the blame on the public. The public may respond by spending less money but it's the financial institutions and government policies that cause this in the first place. Government policies flood the market with currency and encourage banks to give out loans. People buy far more than they ought to and since there aren't enough goods to go around, prices and inflation sky-rocket.

turquoise
Post 2

@donasmrs-- It's kind of inevitable isn't it? People see what's happening in the country and the economy. They see the rising inflation, the higher prices and they realize that it's getting harder to make ends meet.

And then there are also disasters like the mortgage crisis in 2007. It's difficult to have confidence in the economy when people are losing their homes and their jobs.

But I do admit that whenever something starts going wrong in the economy, there is an exaggerated response, a sense of panic among the public. As you said, people expect the worse. News channels actually make this worse by spreading financial fear and warning people that rough times are ahead. Media definitely feeds into the panic. And I believe that this panic slows down the economy much more quickly than it would have otherwise.

donasmrs
Post 1

Part of me feels that everyone would just be better off if people did not lose confidence in the economy and just acted normal. But on the other hand, I understand why this reaction occurs. It happens to all of us. We want to be prepared for the first and we prioritize where our money goes.

It's actually strange because I often hear economists complain that Americans spend too much and do not save enough. On the other hand, they complain that Americans are being too cautious and not spending enough when the economy is bad.

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