Legendary investor and bubble expert Jeremy Grantham is in a gloomy mood. “We are on the road to zero growth,” he warns in his latest letter for his fund management group, GMO. When we finally recover from the credit crunch, “most business people… expect a recovery back to America’s century-old 3.4% a year growth trend”. But they “should not hold their breath”. American growth is in a long-term downtrend. Expect it to average 0.9% a year until around 2030, and 0.4% from 2030-2050. For the rest of the developed world, shave about 0.5% off these figures.
It’s a question of population and productivity trends – the two main elements of growth. They are both heading in the wrong direction. The working-age population in the US was growing at 1.5% a year in 2000; by 2025, the figure will be 0.2%. As countries become richer, workers work fewer hours. And the rise in the female participation in the labour force peaked in 2000.
Productivity is also on a structural downtrend. Capital investment is “abnormally low” these days because the bonus culture has encouraged companies to keep money on hand rather than dent near-term profitability with capital spending. Productivity is inherently greater in manufacturing than in services but the overall shift in Western economies is towards the latter. “We turn out to have an inexhaustible supply of clever ideas” in the making of TVs or solar panels. It’s harder to improve a haircut or gardening work in quantum leaps.
The cost of natural resources will increasingly drag on growth as they become scarcer. Cheap gas from fracking helps, but “most of the stimulus [from it] is already in the system”, reckons Grantham. In sum, expect miniscule growth in the US and “about zero” expansion in the rest of the developed world, which has worse demographics, over the long term.