Understanding what slower growth means for business
This is the second of three posts on how we ended up in a slower growth world, what it means for business, and how organisations can respond. Part 1 is here.
Part 2: How demand disappears in a slower growth world.
A Demand Problem
Companies and brands are facing a consumer disruption of demand. The challenge of slower growth is more than just a weak economy. It is a big downward shift in the set point of growth, a significant change in the external environment tied directly to consumer demand.
Economists of all stripes agree that greater demand is the fundamental ingredient for a return to strong growth. The conundrum is that growth is not only affected by demand, it also influences demand. This lowers the set point of growth.
Exhibit 6 shows this pernicious feedback loop. Slower growth contracts both disposable income and the number of consumers able to spend. As these two things combine to contract spending or demand, growth slows even more, further weakening demand. In other words, once the economy shifts to a lower set point, this feedback cycle keeps the economy at this lower set point. The only way to break the cycle is to get outside of the cycle, and that requires that companies create demand.
Weaker consumer spending is evident already. Exhibit 7, below, shows the long-term trend line of annual growth in worldwide real consumer expenditure per capita. Since the end of the Great Recession, spending growth is over one-third lower than it was in the late 1970s and nearly 30 percent lower than it was in the period just before the financial crisis. To be clear, this is not a decline in total spending, but, rather, a decline in the rate of spending growth, or a leveling out in the trend line of the available market.
These declines in spending growth run in parallel with the declines in GDP growth shown in Exhibit 1, in the first part of this three part post. These two factors are tightly connected in a feedback loop in which slower economic growth weakens spending growth at the same time that weaker spending growth slows down economic growth.
As seen in Exhibit 8, in the early years of the 2000s, spending growth in developing markets was trending up strongly even as it was trending down in developed markets. But a year or two before the financial crisis, this reversed, with spending growth in developing markets slowing. Since then, spending growth has been trending down in both developed and developing markets. Each market is different, but slower growth is the external environment everywhere.
A big reason why spending growth was so much stronger for many years in developing markets was that economic growth was lifting people out of poverty, giving them disposable income to spend for the first time. Since the beginning of this century, over 700 million people worldwide have been lifted from poverty, but slower growth is now putting the continuation of this trajectory at risk.
A detailed analysis by the Pew Research Center concluded that the newly emerging global middle class is “more promise than reality.” Little of the progress made in reducing poverty has expanded the ranks of the middle class. People are better off but just barely, and remain vulnerable to economic shocks that would return them quickly to poverty. Even those who have moved into the middle class are at the lower end of the range and thus vulnerable as well. As Pew noted in reviewing figures published by other organizations, the bullish estimates of the new middle-class that have made big headlines use over-broad income ranges that tend to exaggerate progress.
Already, slower growth is chipping away at some of the gains made during the 2000s. For example, the reversal of fortunes in Brazil is expected to return three million newly middle class families back to poverty. Developed countries are affected as well. In the U.S., the share of people who fall into the middle class is no longer a majority of Americans.
More than setbacks in numbers, though, slower growth will reduce the rate at which people are lifted from poverty. When growth is strong, faster economic expansion enables larger numbers of people to enjoy higher incomes more quickly (assuming shared distribution of gains). Conversely, when growth is slower, fewer people move up. With slower growth ahead, the emerging middle class will still expand, but the numbers emerging each year will be fewer.
In every way that it affects the marketplace, slower growth is a disruption of demand. Growth for companies and brands won’t come from following expanding markets. It will have to come instead from expanding within bounded markets. Companies and brands can’t piggyback their business growth any longer on a trend line of fast growth in money and consumers in the economy at large. The set point is lower. This is what makes fast growth in a slower growth global economy a feat of defying gravity. It requires creating demand, not following trends.
Diminished Compound Effects
When economic growth is strong, its effects can be spectacular because of the way in which it compounds gains. The annual global GDP growth of roughly 5 percent in the 1960s and early 1970s meant the average standard of living worldwide was growing at a rate of doubling every 14 years. At 3 percent, doubling takes 24 years. At 2 percent, doubling takes 36 years. In other words, small declines in growth rates translate into multiplicative increases in the time it takes for standards of living to grow.
The impact of such diminished compound effects was put bluntly by New York Times Upshot reporter Neil Irwin, who noted that at current rates of U.S. productivity growth (translated into its impact on GDP growth), “your grandchildren would be no richer than you.”
China is another case in point. Over the 34 years from 1978 to 2011, average annual GDP growth in China was 10 percent. That meant a doubling of the average standard of living approximately every 7 years. The average Chinese person who lived through that period saw his or her standard of living double five times, more than a thirty-fold increase. Going forward, China’s growth is expected to be much slower, perhaps less than half of what it was for those thirty-plus years.
Slower growth does not mean an end to growth. It means an end to higher economic growth and to the growth in demand it generated.
Thus, it also means an end to business practices built for higher growth. Slower growth requires fresh ways of divining growth opportunities and building on them.
Nothing in the global economy is the same everywhere. But slower growth has a reach that touches everything through tightly knit, interlocking chains of trade, finance and communications. Just as stronger growth influenced decisions about everything, so, too, will slower growth.
In Part 3, we will look at how business can find growth in slower growth markets.
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.
