The outlook for the global economy over the next 20 years seems grim. After roughly two decades when everything seemed to go right – inflation was tamed, technology boomed, globalisation opened up new markets – many people now reckon everything is set to go wrong.
Yet one lesson of the past 100 years has been that surprises are, more often than not, on the upside. After a traumatic shock, the economy often does far better than most people thought it would. That was certainly true after the inflationary traumas of the 1970s, and it was true as well after both World War I and World War II. Could it be true again?
It certainly doesn’t seem like it from where we’re standing. The 1990s and 2000s will no doubt go down as a uniquely benign period for the global economy. The Bank of England governor, Mervyn King, took to referring to it as the ‘NICE’ decade – ‘Non-Inflationary Consistently Growing’ – and that about summed it up. After the oil shocks and recessions of the 1970s and 1980s, just about everything came good. Inflation behaved itself. Governments everywhere began programmes of deregulation and privatisation. Communism collapsed, propelling lots of new countries into the free market system. The growth of computers, mobile phones and the internet spawned huge new industries. It was a prosperous golden age, in which all we had to do was worry about spending wealth, not creating it.
In the wake of the global recession of 2008/2009, it’s easy to imagine that this is all over. The banking authorities warn us that any return to growth will be a long, hard slog. Debts are massive in the private and public sectors. Borrowing will have to slow and taxes will have to rise. The world is awash with excess capacity, destroying profits for a generation. Populations are ageing, creating huge demographic problems. Resources are scarce once again, and it may not be long before we have inflation to contend with too. Charles Bean, the deputy governor of the Bank of England, already refers to it as “the great contraction”, a view shared by many policy makers. They don’t expect the good times to return soon.
And yet the aftermath of a traumatic shock to the global economy is often better than people imagine. “The periods after the two world wars in the 20th century, the inflationary 1970s, and the emerging markets crisis in the period from 1997-2000 were all thought likely to be the gateway to stagnation, but economic performance, in the end, surprised on the upside,” argues George Magnus, senior economic adviser to UBS, in a recent analysis.
We may well be surprised again. While there is no point in ignoring the problems, there are reasons for optimism too. First, over the next 30 years the world’s population is expected to grow by another three to four billion people. Most will be in the emerging economies, so while Europe and the US may have a demographic crisis, those economies will still be thriving. Many of the big developing economies – in particular China and India – will have a rapidly expanding middle class. They will have reached the point where they stop simply buying necessities and turn into affluent consumers. That could be one of the big drivers of growth in the next 20 years.
Second, in Europe and America lots of people don’t work. In Britain, for example, around five million people are on incapacity or unemployment benefit. The same is true in many other countries (even if they have other ways of disguising the unemployment). People still routinely retire at 55 or 60, even though they may well live for another 30 years. A combination of welfare and retirement policies has pushed down the percentage of the population that works. If that starts to change – and the pressure on public finances over the next decade means it will probably have to – then it will release a huge number of people into the labour force. Since the number of workers is one of the main determinants of long-term growth, that would give the economy a big boost.
Thirdly, a whole continent was excluded from the economic boom of the last decade: Africa. While the rest of the world got richer, Africa got poorer. That doesn’t make sense – the continent has too many valuable raw materials to be ignored. At some point, Africa will be re-integrated into the global economy, unleashing yet another driver of growth.
Finally, don’t discount another technological revolution. Mobiles might have reached saturation point. The internet may not be able to grow in the next decade the way it did in the last. But, by definition, we have no idea what will be invented in the future – if we did we’d already be making it. With the global population rising, and education improving in the developing world, it would be very odd if the world’s inventiveness slowed down. It is much more likely to speed up – and all the new inventions will create new industries.
The global economy has a great capacity to bounce back from adversity. Undue pessimism can be just as expensive for investors as exaggerated optimism. Growth has surprised us before – and it may well do again.