Growth was fine until it wasn’t, at least according to financial markets. A few economic indicators underperformed expectations, and stock market and bond markets moved to the depressive end of manic. Pundits cooed about ‘corrections’ and then panicked.
In truth, growth has been slowing for decades. A global average GDP growth rate of anything around 3 percent is now considered acceptable. This compares to 5 percent between 1950 and early 1970s and 3-4 percent subsequently. Recent growth is also of poorer ‘quality’. It is volatile, unevenly distributed and the drivers are unsustainable.
Since the 2008 global financial crisis, activity has been driven by loose monetary policy (low, zero and even negative interest rates) and fiscal largesse, made up of tax cuts and spending on programmes that range from the rational to the quixotic. Lower interest and corporate tax rates explain probably half the real growth in corporate earnings over that period.
Global growth became unbalanced and excessively dependent on emerging markets like China and India, which have structural issues. Activity was based on cheap money-driven speculation into real estate and ‘growth’ stocks, such as the ‘magnificent seven’ focused around emergent technologies. This inflated financial asset prices and the paper wealth of higher income sections that own them, but inequality worsened. GDP per capita increases in many advanced economies are lacklustre.
There is an event-driven element, such as the rebound from the contraction of the pandemic or one-off spending on wars and disasters. True growth relies on four fundamental factors now in decline.
First, demographics—rising population and increased participation in the workforce drives activity. The world’s population doubled twice in the 20th century. It will not do so once in this century. Population growth in advanced economies is slow. It is largest in geographies where poverty and lack of opportunities mean their contribution is marginal. The global population is also ageing, slowing spending and increasing the claim on income for health and aged care. There is still scope to increase workforce participation in some nations, but that depends on employment opportunities and cultural issues. Urbanisation benefits have slowed.
Second, rising trade underpins activity increasing markets and access to labour and resources. With most countries now integrated to some degree into the global system, that too has run its course. Concerns about sovereignty, security, domestic job loss and immigration are accelerating trade barriers, which will impede cross-border commerce and skills transfer. This will be felt especially in emerging markets that are reliant on both to drive development.
Third, as is now frequently cited, productivity improvements have slowed as major one-off gains from improvement in workforce skills and tech have diminished.
Fourth, innovation is waning. A new industrial revolution, despite consultants and futurists’ pretty presentation slides, is not on the horizon. New technologies do not represent the quantum leap that characterised earlier episodes that introduced electricity, internal combustion engines, modern communication, entertainment, petroleum, chemical and computing.
New faddish technologies are not dramatic changes and are unlikely to create the much-sought-after virtuous cycle that creates large industries and well-paid employment. Most innovation is focused on marketing and selling existing products or amusing us to death. Smartphones and internet connectivity that feed cheap narcissism will not address urgent problems such as new resources, improving crop yields, cheap clean energy and its storage.
Many technologies such as robotics actually reduce living standards as it replaces most workers. Innovation now is about the enrichment of a few people who control the technology at the expense of the vast majority, entrenching and increasing inequality.
The flagging effects of traditional growth drivers was what drove the world to financialisation and debt, which is not durable. It now requires $3-5 in debt to produce an additional $1 of GDP. This means debt must increase exponentially faster than economic activity until borrowing levels and servicing costs, especially at normalised interest rates, become unsustainable.
Several factors impinge upon future growth, such as environmental constraints. Climate change is already affecting the habitability of parts of the earth’s surface, production, crop yields and transport links. The cost of the required energy transition away from carbon-emitting fossil fuels is estimated by the McKinsey Global Institute at $9.2 trillion annually, equivalent to around 10 percent of global GDP or half of global corporate profits and one-quarter of total tax revenue. The alternative is perhaps greater expense on adaptation, such as relocating millions, and disaster response.
Shortages of water, food and minerals, such as traditional energy and also materials required for the energy transition, are already evident. Geopolitical tensions will manifest in the form of greater demands on available income for defence security.
The impact of these factors will intertwine and increase over time. Conflicts over climate change and resources cannot be dismissed. External military adventures to divert attention away from reduced economic prospects are not unknown.
The implication of slower unstable activity extends beyond the economic. Growth is the central assumption underlying our political and social systems. It is the mechanism relied upon for improving living standards, reducing poverty, and solving the problems of over-indebted individuals, businesses and nations. All brands of politics and economics assume sustainable, strong economic growth, combined with the belief that policymakers can control the economy to bring this about.
Unless a Zen Buddhist-like renunciation of materialism emerges, a new volatility enters the equation where citizens’ expectations cannot be met. The body politic fractures and government becomes more difficult. It requires uncomfortable coalitions. Tenure shortens. Dissatisfied voters turn to more extreme leaders promising simple salvation, leading into a death spiral.
These risks, building for decades, have been ignored. Following the advice of Jacobi, the great Prussian mathematician to always ‘invert’ as a means of solving difficult problems, leaders have sought to defy economic gravity with a variety of financial tricks. Like a man told that he is going to die in a particular place and tries to avoid going there, people do not want to face the inevitability of slower economic growth.
(Views are personal)
Satyajit Das | Former banker and author