How slow growth became a business reality
This is the first of three posts on how we ended up in a slow growth world, what it means for business, and how organisations can respond.
Part 1: Welcome to a slower growth world.
Slower growth is the new normal for the global economy, and it has business leaders worried. The fear is “a world of zeroes,” the phrase used by Nigel Wilson, Global CEO of insurance giant Legal and General, to describe a world of zero inflation, zero GDP growth per capita, and zero productivity growth. In short, a global economy in which progress is zeroed out.
Defying gravity in order to grow despite the slowing tug of the marketplace is an undertaking unfamiliar to a generation of business leaders weaned on hardy growth. The critical imperative of future success will be creating demand, not the classic textbook lesson, fruitful for so long, of following trends.
Of course, even with slower growth there will be more people with more money each year, but just not nearly as many more people with nearly as much more money as before. In other words, slower growth in the broader economy will diminish growth in the size of the ‘available market’ for a company or a brand. The slower growth trend line will not be as strong, hence, to succeed, companies and brands will have to create demand above and beyond trend.
The challenge of creating demand is not new, but in a slower growth global economy, it must leapfrog following trends as first priority. Research shows that once a company’s growth rate slumps below the rate of growth in GDP, the chances of that company returning again to high growth become vanishingly small. Companies will face sinking prospects if they don’t adapt quickly enough to slowing growth in the size of the available market. The imperative of creating demand is more pressing than ever.
Three things define the challenge of slower growth. The first is the macroeconomic reality. How much will growth slow, and how long will slower growth persist?
The second is the nature of the disruption confronting business leaders. What, exactly, is being disrupted by slower growth?
The third is the kind of the solution needed to defy the gravity of slower growth. To create the demand needed to grow, what must companies do and where can brands look?
This series of Future Perspective articles on Medium addresses each of these questions in turn. It begins by reviewing the evidence on slower growth. Then it turns to the consumer disruption of demand that businesses are experiencing because of slower growth. Finally, it outlines approaches for identifying new sources of growth in a slower growth global economy based on the experience and work of The Futures Company to help clients create demand.
Slower Growth
In developed and developing markets alike, the global economy is not growing at the rate it was before the Great Recession. But, actually, slower growth is nothing new. As Figure 1 shows, the rate of growth in real global GDP has been in steady decline for decades.
According to the International Monetary Fund, there have been four roughly year-long global recessions since the end of WW2, shown by the gray bars in Exhibit 1–1975, 1982, 1991 and 2009. The periods between recessions are telling. After each recession, average growth has been weaker coming out than going in. Every downturn has pushed the set point of growth lower. The global economy has been losing steam for some time. But the current situation is uniquely worrisome.
Since 2011, annual growth has continued the historical pattern of being weaker after a recession than before, sputtering along below 2.5 percent, which is a particular threshold of worry. At this slower rate of growth, it is not clear that the global economy can reach escape velocity from the 2009 Great Recession, and if not, the past several years of stagnation in employment, wages, business investment and consumer spending will persist.
The plunge in oil prices and the sharp slowdown in China have worsened prospects for a return to robust growth. Slower growth in China is especially worrisome because in the immediate aftermath of the Great Recession there was hope that developing markets, led by the BRICs of Brazil, Russia, India and China, would take over as the engines of global growth. Indeed, immediately following the Great Recession, developing markets jumped right back to pre-downturn growth rates. But as Exhibit 2 shows clearly, this was short-lived. Developing markets have slowed significantly, with Brazil and Russia at a standstill. Business leaders are faced with slower growth everywhere.
Structural or Cyclical
Economists are divided over whether slower growth is structural or cyclical. Either way, though, the economic reality is the same. Slower growth is the new normal.
Larry Summers and Tyler Cowen points to the structural story of ‘secular stagnation,’ in which low growth and high unemployment are immune to conventional policy tools such as interest rate reduction. As Paul Krugman noted in summarizing this argument, if Summers is correct, slower growth will be a dogged, persistent problem: “Secular stagnation is the proposition that periods like the last five-plus years, when even zero policy interest rates aren’t enough to restore full employment, are going to be much more common in the future.”
Robert Gordon tells a different story, yet agrees that slower growth is structural in nature and thus here to stay. Gordon argues that post-WW2 economic growth is petering out because it was powered by turn-of-the-20th-century innovations that were one-time step changes in productivity, never to be seen again. Add to that, strengthening headwinds in demographics, education, inequality, globalization, energy and the environment, and debt overhang. Putting it all together, Gordon foresees future growth slowing to a perpetual crawl.
In contrast, economists such as Carmen Reinhart, Kenneth Rogoff and Ben Bernanke contend that the current low growth is a cyclical phenomenon caused (in full or in part) by a ‘debt super-cycle’ characteristic of financial crises, which will depress household spending and business investment until deleveraging has run its course, after which growth will improve. However, research by Reinhart and Rogoff finds that the difficulty and hardship of deleveraging makes recoveries from financial crises much longer than average.
Somewhere between these two camps are technology-led perspectives, such as The Second Machine Age authors Eric Brynjolfsson and Andrew McAfee, who argue that there are lulls between periods of innovation and productivity growth, and we are in such a lull today. In this, they are following the work of Carlota Perez on ‘great surges’ in technology and innovation. By this model, a new wave of technological innovation will eventually reignite the economy (depending on how the gains from growth are shared). Yet any such return to growth could easily be 15 or more years away.
Whether the economic factors are structural or cyclical, a slower growth global economy is the reality facing business leaders for the foreseeable future. But there is something at work even more fundamental, which is a deeper demographic dynamic that makes slower growth a certainty.
Population and Productivity
Two things generate economic growth — population growth and productivity growth. In other words, the total output of an economy is the number of people producing output times the amount of output each person produces. When one or both of these grow, the economy grows. It all comes down to numbers and efficiency, or population and productivity. The global economy faces challenges on both fronts, but the more insuperable of the two is population growth.
Exhibit 3, below left, shows the trend line for the rate of global population growth from the end of WW2 until today. In both developed and developing markets, growth rates have been declining, and are lower now than in the mid-20th century. Demographers expect no change in this trend line through the end of the century.
The population trend that matters most is working age population, or the people actually producing economic output. Exhibit 4, on the right, shows the worldwide drop in growth of 25-to-64 year-olds. It is a steeper drop than that for total population.
Slowing population growth ensures a future of slower growth. A lower set point is assured. The McKinsey Global Institute calculated the impact of slowing population growth, making an assumption that productivity growth would continue at the same level over the next 50 years as in the past 50 years.Declining population growth means a 40 percent drop over the next half century in the compound annual GDP growth rate for the G19 markets plus Nigeria. But this assumption may be optimistic.
If experts like Gordon are correct and productivity growth abates, then the drop in global economic growth will be even larger than McKinsey’s calculations. The only way to avert this plunge in economic growth is for productivity to grow so much that it offsets the impact of declining population growth. According to McKinsey estimates, this would require that productivity growth be 80 percent higher in the future than it has been in the past. Unfortunately, recent historical evidence is not encouraging that productivity growth can be reignited to that degree.
The Federal Reserve of Chicago compared average annual productivity growth in 21 developed markets for the 1990s versus the 2000s. For all but one of these markets, productivity growth in the 2000s was well below that in the 1990s. Furthermore, in the 1990s, average annual productivity growth was negative in only three markets; in the 2000s, it was negative in all but seven markets, as seen in Exhibit 5.
The odds are very long that future productivity growth can outpace past growth by the margin required.
Whatever unfolds with technology and innovation, and the impact on productivity, the size of the gap in lost economic growth due to declining population growth is going to be too much to make up. The bottom-line is clear. Slower growth is the new normal for which business leaders must prepare.
In Part 2, we will look at what slower growth looks like for business.
This article is lightly edited from The Futures Company’s Future Perspective report, Defying Gravity: Sources of Growth in a Slower Growth Global Economy, by J. Walker Smith, Andrew Curry, Joe Ballantyne and Mark Inskip.
