Slow Decade Ahead
Industrialized countries are facing a set of structural forces that will render the decade 2020–2030 quite a challenge on many angles. Here is a run down. As I explained in my post “Central Bank Money is the Only Hope”, asset prices and even social order currently hold only with massive central bank money, which is slowly fading in some countries.
IMF projections suggest the slowest decade in a very long time for rich countries going forward and the same for the other decade after that: USA, Japan, Germany, France, Italy, Canada, UK, Spain, etc. All will have grinding slow economies, which will hurt government tax income while putting upward pressure on government spending. In fact, it is shaping up to be the slowest decade in 50 years for the overall average of industrialized countries.
It is easy to understand why this is so. As I mentioned in a past article, total GDP growth is due to only TWO variables in the long run picture:
- Total potential workers.
- Production per worker (aka “productivity”).
Even with immigration and all kinds of other policies to boost both of these, most contries will struggle to hover close to 2% growth, with ranges between 1% and 2%, on average. The “new normal” is eternal stagnation, and many countries will have trouble adapting to this new permanent context. It will “feel” like eternal stagnation and will drain optimism and mood.
Consequences
Stagnation causes frustration and “anti immigrant” sentiment in the population. It’s an opportunity for extreme points of view to get followers.
While the rich world will stagnate, the rest of the world will grow, and upper incomes of rich countries will benefit from this because the top 10% generally benefit quite a lot from globalization and emerging market growth, which will add to income inequality and to increasing price pressure on housing due to global capital looking to park somewhere.
Stagnation also makes the government tend to shy away from spending, and it can ultimately force governments to cut spending or increase taxes. Don’t expect much open wallets for climate policy: it’s not gonna happen!
Many countries could try to fight structural stagnation with “short run boost” policies such as infrastructure spending, tax cuts, and monetary expansion, but in the end, none of these will change the underlying fundamentals and most of these will run into the issue of government debt and resistance to tax hikes and spending cuts.
The overall effect is one of social tension and political poison. I expect much challenges to the Eurozone over the next decade, as well as for the Japanese bond market.
The last 5 decades had more favourable outlooks for demographics and productivity growth, as well as always some major “part” of the economy with low debt loads that was able to “pile on” debt. The 3 broad sectors that can pile on debt and spending that adds short-to-medium-run upward momentum are households, corporations, and the State. Today, and even more so going forward, most governments and corporations have already-high debt loads and households seem to be either already in high debt OR categorically refusing to add more debt, all this with historical lows for interest rates. 2010–2020 was the lowest interest rate decade ever and that just allowed to pick up the slack from the 2008 global recession. We are now headed for a cyclical high around 2020 with fading effects of past fiscal and monetary stimulus and structural forces resurfacing after 2020.
We are now entering the 2020–2030 decade with:
- High government debt-to-GDP ratios in most countries.
- Negative or stagnating demographics.
- Average to sluggish productivity growth.
- At best no change of interest rates, but probably slightly higher rates.
- Growing climate change pressure.
This entire context will put additional pressure on Japan’s bond market, on the Euro Area in general, and the US social and political climate. The geopolitics of all this will be interesting, as well as the social order and the macro financial dynamics. Looking at the cold hard facts, it is shaping up to be quite a challenging decade, and the decade after that is shaping up to be more of the same. Clap and share!
Pascal Bedard
