November 30, 2019
Lower Growth Takes Root in a 4 D World
November 30, 2019
We don’t regard our outlook for 2020 as bullish or bearish, just realistic. It is built around a recognition that the post-war economic miracle is over, the forces that drove it are played out, and every country needs to lower its growth ambitions.
In the early decades after World War II, growth was driven by the baby boom and rising productivity. When population and productivity growth began to slow a bit around 1980, two new growth drivers came along: debt and globalization. After central banks whipped inflation, they began lowering rates, and global debt began growing three times faster than the global economy. And as countries began opening their borders to flows of goods, money and people, globalization took off, providing another huge boost to growth.
Then came the shock of the global financial crisis in 2008. Cross-border flows of people stalled, flows of goods began to shrink, and flows of money collapsed, as global banks pulled back to within their own borders. In part because globalization was slowing, thus reducing competition, and much of the world’s amassed debt (now more than 300 percent of global GDP1) had gone to unproductive investments, global labor productivity growth fell from an average annual rate of 2.5 percent between the mid 60s and 2008 to less than one percent in the years since – see Display 1.2
Source: OECD, Labor productivity growth of OECD countries.
At the same time, for reasons that had nothing to do with the crisis of ’08, a long term decline in birth rates was starting to shrink national labor forces. Between 1950 and 2008 annual growth in the world’s working age population averaged close to 2 percent, since then it has averaged barely one percent – see Display 2.3 Fewer workers translates directly to lower economic growth. The number of countries in which the working-age population is shrinking has spiked from 2 in 1985 to 46 today4, including major powers from Germany and Japan to China and Russia, and is on track to double to around 903 in coming decades.
Source: United Nations as of December 31, 2018. Working-Age Population refers to those aged 15 to 64 years. Forecasts are subject to change and may not come to fruition.
So as we enter 2020, leaders need to recognize that we live in a world economy slowed sharply by the Four D’s: Depopulation, Declining productivity, Deglobalization and a massive Debt burden. The world’s average growth rate during the post-war miracle decades was 4 percent, now its potential is less than 3 percent.5
Some countries that still have some combination of growing population, rising productivity, expanding trade or a robust domestic market, and light debt will fare relatively well in the four D era. Among the likely winners for 2020 we would include Indonesia, the Philippines, Mexico and Brazil, which for varied reasons are relatively immune to depopulation, deglobalization and the global debt burden. In the developed world, Germany and the Netherlands look comparatively strong.
But no country rich or poor can sustain the growth rates of the post-war miracle era when the rest of the world economy is slowing around it. With the world’s growth potential falling sharply, every class of country needs to reset its ambitions to a more realistic level. Poor countries like India still scramble to grow at 7 percent, but should dial down to 5. Middle income countries like China still aim to grow faster than 5 percent, when 3 to 4 percent is more realistic. Rich countries like the United States need to understand that one to two percent is the new normal.
The risk is that many politicians are still fighting to restore the growth rates of the miracle era, by running up spending and debt. They can’t force economies to grow above their potential for long, and are thus doomed to fail. Better to recognize the reality of the Four D World in 2020.
1 Michael Roscoe, U.S. Fed, BIS, Economist, last data point as of Q2 2018; source: IIF
2 OECD, Labor productivity growth of OECD countries.
3 United Nations as of December 31, 2018. Working-age population refers to those aged 15 to 64 years. Forecasts are subject to change and may not come to fruition.
4 UN Population Data, MSIM EM Research as of December 31, 2017 (UN Data includes Projections). Forecasts/estimates are based on current market conditions, subject to change, and may not necessarily come to pass.
5 World Bank, United Nations. Data as of 2018.
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