The US-China trade war and Brexit don’t help, but behind sluggish global growth lies political gridlock
- Income inequality, an ageing workforce and a focus on creating short-term value for shareholders are some of the reasons for the global growth slowdown
- Behind all of these is a deadlocked political process in advanced economies that prevents investment in much-needed infrastructure that could spur growth
The US economy ended 2018 with a whimper and a 1.1 per cent annual rate of gross domestic product growth, and then started the first quarter of 2019 with a bang – 3.1 per cent growth. The economy has since settled back to 2 per cent or less, where it seems likely to linger unless major shocks occur.
Consumers keep spending, but business investment is sluggish. Monetary authorities have eased about as much as they can. Short and long interest rates in the United States are now zero in real terms – adjusted to remove the effects of inflation and reflect real borrowing costs and yield – and negative in nominal terms in much of Europe and Japan.
In any case, China’s imports in 2017 were lower in US dollars than in 2013. Precautionary buying ahead of tariffs led to a large jump in imports for 2018, but there has been a decline in import value since.
Data on income or wealth inequality is not as robust as GDP, but in the US and probably in China, there has likely been a concentration of gains in the top few per cent in the past decades. Similar patterns are less marked in Europe and Japan.
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US pay cheques are larger than those of 40 years ago, yet purchasing power has not kept pace. Several years of low unemployment in the US have yet to push real wages up much – average real hourly wages are finally catching up to those of the 1970s.
Given that real GDP per capita has more than doubled during this period, it is clear that most of the productivity gains have gone to profits or very high salaries. If, indeed, there is a lack of demand which can only be remedied by borrowing, if income distribution remains unchanged, it would explain periodic credit crises as borrowing outruns the ability to repay.
It would also explain why moves to strengthen lending rules lead to sluggish GDP growth: credit growth is constrained and spending based only on incomes is not sufficient to drive healthy demand growth.
Another perspective emphasises the age structure of the population and workforce. Older people do not spend as much as those just forming families and buying their first home.
If student debt or uncertain job prospects lead to delayed marriage and household formation, or lower birth rates altogether, that would depress demand. Likewise, a higher proportion of old people would tend to reduce spending.
A third line of analysis argues that short-term shareholder value maximisation exerts a negative influence on growth. Firms tend to invest less in research and development, machines or employees, preferring to use profits or even debt, to buy back shares of stock.
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That increases profit per circulating share and tends to boost the share price. Slow productivity growth is consistent with this story.
Having said this, it may be that the need to curtail carbon emissions will require investments that reduce pollution, but do not add much to measured output. There are “win-win” investments that reduce costs and carbon, but in some cases there will be a net burden.
Rising ocean levels, agriculture disruptions, and floods, fires and extreme temperatures impose costs that reduce growth. Thus, the prospects for future growth, barring unexpected technical developments, are muted. This, in itself, could make political compromise more difficult since there is less growth to share.
David Dapice is the economist of the Vietnam and Myanmar Programme at Harvard University’s Kennedy School of Government. Reprinted with permission from YaleGlobal Online