-- Posted Thursday, 24 November 2011 | | Disqus
By David Collett
Slowing World GDP Growth
World Growth versus US Growth
Can Asia’s growth hold up future world growth?
Allocation of capital resources to the most productive investments
Future World Growth
Since the roaring 1950’s and 1960’s, the world’s economic growth has trended downwards over the subsequent four decades. In the last decade, this downward trend is even more pronounced for advanced economies, which include most European countries and the United States.
When we compare the Great Recession with the Great Depression and the roaring decades in between, a few things stand out:
1. The similarity of certain economic trends that preceded both of the above crises.
2. The similarity of issues that impeded robust economic recovery in the ensuing periods.
3. The trends and structural changes that supported a recovery in the thirties and forties and a booming economy in the fifties and sixties.
4. How the biggest creditor (United States) became the biggest debtor making China the new king of credit.
5. The pervading resistance to acknowledge the true nature of the structural problems in the economy
Exceptional innovation, robust productivity growth, decreasing taxes, expanding credit and the concentration of wealth measured by both income and net assets preceded both crises – at least where the United States was concerned. It is uncertain as to what extent these trends were prevalent in all the major economies of the world in the 1920’s. However, there is little doubt that the majority of the above trends were present in most of the big economies over at least the last two to three decades.
Slowing World GDP Growth
Chart G-1 below shows the World GDP growth per decade (19X1 to 19X0) from the twenties till the end of 2010. It’s clear from the chart that world growth boomed in the fifties and sixties after a slow upward trend from the early 1900’s. Since the seventies we see a downward trend in growth despite the huge contribution made by Asian countries over the last three decades.
Some believe that the expansion of the world economy in the forties and the booming two decades that followed, was mainly an American story due to the advantage of an undamaged manufacturing industry post World War II. That may be true for the forties but not so for the subsequent two decades as many countries that suffered severe war damage during World War II, outperformed the United States in economic growth during the fifties and sixties.
World Growth versus US Growth
In Chart G-2 below, we compare World GDP growth for each decade (19X1 to 19X0) with that of the United States.
US growth moved in lockstep with World growth until the thirties. During the forties it outperformed the rest of the world for reasons mentioned above. Since the fifties the World economy outperformed the US economy, especially in the first decade of the 21st century. Many European countries (e.g. Italy and Germany) grew faster than the US in the fifties and sixties but since slowed even faster than the US. Asian countries contributed most to World growth over last three decades. During the last decade (which ended on 31/12/10) advanced economies’ growth slowed considerably. Currently many of them are in contraction or close to it.
Can Asia’s growth hold up future world growth?
In contrast to advanced economy’s deteriorating growth, developing Asia’s economies grew strongly over the last three decades. The difference in growth rates between advanced economies and developing Asia is shown in Chart G-3 below.
The above charts pose the following questions:
1. Why did the two groups grow at such different rates over the last three decades?
2. Can developing Asia continue to grow whilst the advance economies of the America’s and Europe continue its decline in growth and possibly outright contraction?
3. Will the rate of growth for the world economy as a whole continue to decrease over the next decade and beyond?
Allocation of capital resources to the most productive investments
Many studies and articles discuss the cause and consequences of outsourcing and off-shoring of manufacturing industries from advance economies to Asian countries over the last three decades. This process has especially picked up in pace over the last decade as globalisation accelerated. It allowed international corporates (mostly controlled by advanced economies) to move its operations across international borders to the regions or countries that offered the best returns. The main incentive for the move was lower wages in developing Asia which enabled international corporates to cut costs and optimise profits. As manufacturing jobs moved with outsourcing and offshoring it caused wages and incomes to rise in Asian countries while it had a negative impact on wage and income growth in advance economies. This may not be the complete story but it is one of the more credible and popular theories for explaining the decreasing growth rate of advance economies and rapid growth of Asian countries over the last three decades.
If one assumes that the above theory is correct, it only explains the decreasing growth of advanced economies and accelerating growth for Asian countries. It does not however, explain the downward trend in the overall world economy over the last four decades. If growth simply shifted from one region to another why did the world economy as a whole fail to maintain its growth rate?
This answer to the above is of critical importance in finding the answer to slower world growth. In terms of free market economic theory, the above shift in outsourcing and offshoring in search of bigger profits implies that capital resources have been allocated to more productive investments around the world. If we accept that this basic principle of capitalism and free markets is true in all circumstances, then the rate of growth for the world economy should have accelerated over at least the last three decades – not decline. This conundrum poses a challenge to free market theories. The fact that general economic trends were more favourable to growth over the last three decades than the fifties and sixties makes it an even bigger riddle.
Future World Growth
Let us assume that the world authorities and economies are able and willing to pursue and deliver the following over the next decade and then ask the question as to your expectation of future growth:
1. Great advances in technology, mechanisation and robotics
2. Great innovation
3. Increased productivity
4. Huge credit expansion
5. Lower taxation, especially on higher income earners
6. Huge government stimulus
7. Lower interest rates
8. Monetary easing and expansion
9. Easier movement of goods, services and people over international borders
10. Moderate inflation
Some may argue about the merit of some of the above points, but one could safely assume that most would be of the opinion that the above conditions are a potent cocktail for robust feature growth. Now most, if not all, of the above ingredients formed part of the world economy over the last three decades, especially the United States, but with disappointing results for both growth and employment. This is disturbing – if the abovementioned economies could not grow at a satisfactory rate with so many things in its favour, what does the future hold? More important – what is holding growth back?
One possible explanation is that some of the above economic factors, like excessive debt, had negative consequences which limited growth for advanced economies. During the second half of the last decade (ending 31/12/2010), personal and public debt of some advanced economies reached such proportions that it could not be serviced from income anymore. That limited further credit growth which had a slowing effect on the economy. This explanation is, however, unsatisfactory because of the following:
a. The US growth rate followed a downward trend over four decades since the 1970’s that cannot be explained by excessive debts. Consumer debt (as a percentage of income) continued to grow at a fast pace in the last three decades. By bringing forward demand at an ever increasing pace one would have expected such debt to spur faster economic growth, not slower.
b. Although growth in US consumer debt slowed substantially by the end of 2007, the slack in credit growth was to a large extent replaced by increasing public debt, most of which was incurred in an effort to stimulate the economy. This stimulus was expected to turn the economy into a dynamo of strong growth, yet it barely succeeded in rescuing the sinking ship. Growth remained anaemic until the end of 2010 and there is no evidence to indicate it will improve in the foreseeable future.
c. Although studies indicate that additional increases of private and public debt may reach a point of diminishing returns, this point was probably not reached before the end of the last decade (2000 to 2010). It is more likely that increasing private and public debt may have masked a more severe downward trend in growth since the seventies but it was not the cause of slower growth.
d. During the first half (2000 - 2005) of the last decade, US credit growth accelerated at its fastest pace. Despite this “credit-stimulus” GDP growth was lower than previous comparative periods. Increasing private and public debt cannot explain the slower growth trend; at least not while its accelerating. Without the high growth in credit, GDP growth would have been lower.
Some economists and market commentators continue to blame the lack of growth on too much government regulations or lack there-off, too low productivity, too low inflation or too much debt. Although some of these arguments have merit when referring to the status quo, especially financial risk and solvency, we found little historical evidence to support a causal link between it and the downward growth trend over the last four decades.
Our analyses of historical data show that increasing wealth and income concentration in too few hands acted as a drag on economic growth over the last three decades. As it grew stronger, it increasingly negated the many positive forces referred to above. Much of the theory as to how and why it impacted growth was discussed in Part II and IV of “The Dominant Causes of the Credit Crisis”.
In future blogs we will analyse and compare the US economy of the last three decades with the fifties and sixties as well as the period from 1910 to 1940 and look at historical evidence and trends to support our findings. Later, we will also look at China’s economy to make an assessment of its ability to deliver continued high growth in the foreseeable future. In doing so we will attempt to answer some of the questions noted above. The future growth of the United States and China will probably determine the fate of world growth for at least the next decade.
© Copyright David Collett 2010.
Whilst every effort was made to ensure the accuracy of this article, neither this document; nor its author, David Collett; nor any publisher of this article; offer any warranties (whether express, implied or otherwise) as to the reliability, accuracy or completeness of the information appearing in this article. Neither do any of the above parties assume any liability for the consequences of any reliance placed on opinions expressed or any other information contained in the above article, or any omissions from it. Its content is subject to change without notice. Any information offered, is intended to be general in nature and does not represent any investment or business advice of any nature whatsoever. If you choose to rely on such information you do so entirely at your own risk. Neither David Collett nor any third party involved in publishing this article, assume any responsibility or liability for the outcome of such reliance.
-- Posted Thursday, 24 November 2011 | Digg This Article
| Source: GoldSeek.com
