The last few weeks has seen bad news for the global economy, with the US and Europe facing growth slowdowns, and even much vaunted economic powerhouses Brazil, Russia, India and China faltering unexpectedly. While mainstream economists continue to predict an ongoing ‘recovery’, other leading experts point to the end of growth as we know it for the foreseeable future.
Earlier this month, the International Monetary Fund (IMF) slashed its quarterly forecasts for global GDP growth from 3.3% to 3.1%, and revised down growth estimates for other major powers. The US forecast was downgraded from 1.9% to 1.7%, and Europe is expected to contract 0.6% rather than the originally estimated 0.3%. The IMF also downgraded growth forecasts for 2014.
Against this background, evidence has emerged that the era of booming economic growth is over, and that we are entering an age of permanently slow growth – at best.
A new paper in the journal International Productivity Monitor finds that underlying the US recession is a long-term decline in productivity growth, interrupted briefly by the “dot.com revolution” for eight years, followed by a slump “to 1.47 in the past eight years.”
Study author US economist Prof Robert J Gordon of Northeastern University concludes:
“… we face a significant possibility that the disposable income growth for the bottom 99% of the income distribution could be as low as 0.5% per year, or perhaps even 0.2%.”
This conclusion complements Gordon’s previous prediction last year that by 2100, the US economy would return to an annual growth rate of 0.2%. He describes the second industrial revolution as the core driver behind rocketing growth experienced over the last 250 years, noting that the main factor behind the continuing slump since 1970 – escalating over “the last eight years”, was a lack of sufficient industrial innovation capable of fundamentally “changing labour productivity or the standard of living.”
“Future growth in real GDP per capita will be slower than in any extended period since the late 19th century.”
The “headwinds” holding growth back include key economic issues such as “rising inequality”, the “end of the ‘demographic dividend'”, the “overhang of consumer and government debt”, as well as “the consequences of environmental regulations and taxes that will make growth harder to achieve than a century ago.”
While Prof Gordon has his naysayers, his outlook is surprisingly corroborated by other experts. HSBC Group chief economist Stephen D. King’s new book, When the Money Runs Out: The End of Western Affluence, portends how the age of high economic growth will never return, largely due to the “exhaustion of various one-off productivity gains that boosted growth after World War II” and “a tripling in rates of consumer credit founded on an unsustainable increase in housing prices”, among other factors. King disagrees with Gordon’s worst-case scenarios, but agrees that the dividends that made high growth possible in the past appear largely “unrepeatable.”
Last month, King and HSBC also slashed their global growth forecasts for 2013 from 2.2% to 2.0%, which they explained was due to unexpected slowdowns in emerging markets.
These downgrades are yet another example of the failure of mainstream economic models to keep up with the real nature and pace of global economic deterioration. Indeed, missing from the above analyses is recognition of a central factor: that the productivity gains driving industrial growth were enabled by the abundance of cheap fossil fuels and other resources.
In his latest newsletter, legendary fund manager Jeremy Grantham – who made billions predicting every major stock market bubble of recent decades – warns that cheap resources are history:
“Our global economy, reckless in its use of all resources and natural systems, shows many of the indicators of potential failure that brought down so many civilisations before ours.”
Industrial civilisation is currently “completely dependent on the availability of cheap energy.” Therefore, resource depletion combined with “the wild cards of rising temperatures, slowly rising sea levels, ocean acidification, and, above all, destabilised weather for farming” could lead to “a rolling collapse of much of civilisation” – unless the world embarks on a “Manhattan project level of commitment” to transition to an alternative energy and agricultural system.
Last year Grantham issued his stunning but little-known verdict that previous US GDP growth rates of 3% a year are now “gone forever.” Future US growth will eventually approximate:
“1.4% a year, and adjusted growth about 0.9%… The bottom line for US real growth, according to our forecast, is 0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050.”
He adds that Prof Gordon and others have failed to account for the role of “tightening resource constraints” and “environmental costs that increase at an accelerating rate”:
“Resource costs have been rising, conservatively, at 7% a year since 2000. If this is maintained in a world growing at under 4% and a developed world at under 1.5% it is easy to see how the squeeze will intensify.”
Resources might eventually increase their costs at 9% a year, in which case “the US will reach a point where all of the growth generated by the economy is used up in simply obtaining enough resources to run the system.” Within 11 years, under this scenario, “the economic system would be in reverse.”
However, Grantham now highlights two trends that could facilitate the transition to a more stable economy – declining fertility rates and the rise of renewable energy. Garnering data over the last 40 years, he demonstrates a “remarkable drop in fertility” in the US, Europe, the richer East Asian countries including China, and even South Asia and Africa. According to the more optimistic end of UN projections, if such trends continue global population would peak at 8 million by 2050 before declining to near 6 billion by 2100 – a process which could be sped up with appropriate policy measures.
Simultaneously, Grantham argues we may be on the cusp of “a great technological leap that for the first time is accompanied by less energy use – the technologies of solar, wind power, and other alternatives as well as electric grid efficiencies and improved energy storage.” By 2025 to 2030, he observes:
“Both solar and wind power are likely to be cheaper than coal… once the capital is found and the project is built, a wind or solar farm delivers far cheaper energy than a coal-fired utility plant, at around one-third of the marginal cost of coal.”
He estimates that “nonrenewable energy” could be completely replaced by renewables “in 30 to 50 years”, during which the new technologies will become increasingly cheap and efficient.
But Grantham still concurs that these developments cannot herald a return to the era of high growth, although they might smooth the way toward a new economy that is “less overreaching, less hubristic, a lot humbler about growth and our use of resources, and more determined to live in balance with the natural energy we receive from the sun and the heat, food, and water with which we can sustainably be provided.”