26 September 2019

A No-Growth Future?

Since the Second World War, global economic growth has been remarkably steady.  In fact, over the past 50 years, only once (in 2009) did the global economy actually shrink over a calendar year.  This consistency was even more evident in recent years, with annual global economic growth coming in between 3.4% and 3.8% each year between 2012 and 2018, an unprecedented level of consistent growth for the global economy. Furthermore, even with the current economic downturn that we have witnessed so far in 2019, growth forecasts still call for global economic growth of near 3% in 2019 and 2020.  

Nevertheless, some doubts are creeping in concerning the ability of the global economy to continue to generate solid levels of growth in the coming years.  Much of this concern is derived from the fact that a large portion of the economic growth generated around the world over the past two decades has come from emerging markets and now, emerging markets are facing a number of headwinds.  Furthermore, much of this growth in emerging markets has been generated in Asia, and not only have most Asian economies run into difficulties this year, but there are serious doubts as to whether or not there is another Asia out there in the world ready to take its place as the leading generator of economic growth one day. This has led to fears that the world economy could be facing a “no-growth” future, one where very little economic growth is generated when compared to the past decades.

A look at long-term economic growth rates highlights why these concerns about a no-growth future are becoming more pervasive.  For the past 50 years, the world’s developed economies have seen their rates of economic growth steadily trend downwards from 4% from the period of the 1950s to the late 1970s, to 3% in the 1980s and 1990s, to less than 2% over the past two decades.  For many years now, West Europe and Japan have recorded relatively low rates of economic growth, a reflection of their demographic decline and the weakness of their domestic markets.  Now, even more robust New World economies such as the United States and Canada have recorded relatively low levels of economic growth, a trend that is likely to continue.  

In contrast, emerging markets had been growing at a much higher rate.  In fact, since the year 2000, emerging market economic growth has averaged an astounding 5.6% per year, a much higher rate than in previous decades despite a slowdown so far this year.  However, while Asian emerging markets have remained strong, most emerging markets outside of Asia have struggled to record much growth at all over the past five years. 

To see why fears of a no-growth future are increasing, it is important to look at the three factors that drive economic growth, demographics, international trade and investment, and productivity.

  • Demographics: Demographics have always been a key factor in determining an economy’s ability to generate growth. Simply put, more workers and consumers often translates into more economic growth, at least in stable and well-run economies.  In the decades following the Second World War, population growth was high, especially in many of the world’s leading economies.  However, population growth has slowed dramatically in most areas of the world in recent decades.  In developed economies such as Japan and Italy, population growth has all but ended, resulting in a growing imbalance between those countries’ working-age populations and their non-working-age populations.  This situation is now being emulated in many emerging markets, including large economies such as China and Russia, where working-age populations are also shrinking.  As birth rates continue to trend downwards in nearly all important economies, the positive impact of this crucial generator of growth will continue to be reduced, posing a massive challenge for future economic growth and development.  
  • Trade and Investment: Another driver of global economic growth is trade and investment, a factor that has had a massive influence on the world’s economy in the wake of the globalization movement that began in the 1980s.  In fact, the re-connection of economies such as China, India, East Europe and others to the global economy in the 1980s and 1990s was the key driver of economic growth during that period.  It was this surge in trade and investment that enabled emerging markets to record such high rates of economic growth in the first part of this century, as without the ability to export to wealthier markets, these economies would have never been able to generate the level of growth that they did during this period. However, international trade and investment growth has slowed considerably in recent years.  In fact, global trade has expanded by an average of just 1.6% per year over the past seven years, a far cry from the 10%-15% trade growth rates recorded in previous decades.  This is due to a combination of the reduction of the initial benefits derived from globalization and the shift in politics towards more protectionist policies, particularly in many key export markets such as the United States. Thus, trade and investment is unlikely to drive as much growth as it did before the recent slowdown, posing yet another challenge to the global economy.
  • Productivity: As demographic growth slows and as trade and investment face new challenges, there is only one other factor that has the potential to drive a new upswing in global economic growth, productivity.  Unfortunately, global productivity growth rates have been extremely disappointing in recent years, averaging just a little more than 1% per year over the past two decades.  In fact, the productivity gains that had been expected to be derived from the information revolution and other technological advancements simply have not materialized. Worse, long-term productivity trends suggest that productivity growth will continue to slow in the coming years, unless new technologies or processes can be developed that allow for this trend to be reversed.  If it can’t be and productivity growth continues to slow, it will be nearly impossible for the global economy to generate higher levels of growth in the years ahead.

For some people, the fact that the global economy has slowed and appears likely to continue to slow over the longer-term is welcome news.  In fact, some people have called slower economic growth, if not an outright contraction in economic output, a change that is needed if we are to prevent the planet from facing an environmental catastrophe.  However, such hopes are misguided and could prove harmful to those countries that adopt this mindset.  This is due to the fact that the modern world’s economic and social systems are based on economies that expand and generate more wealth for the good of their populations.  For example, how will countries with extensive social welfare systems such as Sweden or New Zealand afford to pay for the needs of aging populations if economic growth shrinks, thus reducing government and business revenues. Instead, the focus needs to be on generating economic growth in ways that are not harmful to the planet or the people that live on it.  Whether or not this can be achieved remains in question, but it is a goal that is both noble and necessary.

So can the world avoid a no-growth future?  Some technologies do offer the promise of higher rates of productivity growth in the future, thus establishing productivity improvements as the basis for strong economic growth in the years ahead.  However, other technologies have promised the same in recent decades, only to deliver disappointing rates of productivity growth.  As for demographics, the stagnation and decline in working-age populations will not change anytime soon. Likewise, opposition to international trade and investment is still growing, while the benefits derived from trade and investment are not what they were a couple of decades ago. Therefore, the only way for the global economy to avoid a no-growth future is via science and technology, which can increase productivity and offset demographic decline, all while (hopefully) improving the economy’s impact on the environment. Unfortunately, too few countries are investing enough in such technologies, choosing instead to focus on areas that will bring little or no long-term economic improvements.  As a result, the threat of a no-growth future for the global economy is all too real and needs to be addressed before it is too late.