Across the world, economists have had to downgrade growth forecasts. But it's not as bad as it sounds.
Last year looked like the time when United States President Donald Trump had delivered on his promises to strengthen the economy. His tax cuts appeared to juice growth above 3 per cent, a pace the US had not topped since 2005.
But last Thursday, the Commerce Department revised last year's growth downwards to below 3 per cent, even as forecasts for this year were also trending lower, towards 2 per cent. It all has triggered another wave of disappointed commentary about doggedly "slow" growth in the US.
But it is not just an American story, and it's not just Mr Trump who won't deliver on promises of 3 per cent, 4 per cent, or even 5 per cent growth. Across the world, economists have had to downgrade growth forecasts in most years since the global financial crisis of 2008.
Defying the hopeful projections, Japan has rarely grown faster than 1 per cent. Europe has struggled to sustain growth faster than 1.5 per cent. No one quite knows how fast China is growing, but it's clear that there, too, the economy is slowing. So why is the dismal science suddenly guilty of issuing overly optimistic forecasts that set the whole world up for disappointment?
Economists keep basing forecasts on trends established during the post-war miracle years, when growth was boosted by expanding populations, rising productivity and exploding debt. But population and productivity growth had stagnated by 2008, and the financial crisis put a sudden end to the debt binge. The miracle is over.
Politicians often promise to bring back a golden age, but serious economists also are encouraging a similar illusion. Even during the Industrial Revolution, in the 19th century, the world economy rarely grew faster than 2.5 per cent a year, until the post-World War II baby boom began to rapidly expand the labour force.
After 1950, the combination of more workers and more output per worker lifted the pace of global growth to 4 per cent. Economists came to think 4 per cent was "normal".
Yet, by last decade, the baby boom had faded out from Europe to Japan and China. Even in the US, younger and faster-growing than most developed countries, growth in the working-age population slowed to a mere 0.2 per cent last year from 1.2 per cent in the early 2000s. Because fewer workers correlate directly with slower growth, that decrease implied a 1 percentage point drop in economic growth.
The world does not need more debt and more inflation to counter trends of declining population growth and high indebtedness. Instead, economists need to adjust their forecasts and politicians need to rethink their polices to match this reality. Because trying to recreate a bygone golden age is a shaky way to build the future.
Roughly, economists should have expected that US economic growth would slow to 2 per cent from 3 per cent - and it has. This is the new normal for the American economy. Stimulus measures like the Trump tax cuts can lift growth above this path, but at best temporarily, at the risk of higher deficits and debt.
For political leaders, the new age of slow growth is not a problem to solve; it's a reality they need to accept and explain to the public. Because it's just not that bad.
When populations are growing slowly, the economy doesn't need to grow as fast to keep incomes high. Thus, in the US this decade, growth in gross domestic product (GDP) per capita has slowed much more gradually than the overall economy, by half a point, to an average of 1.4 per cent.
And though Mr Trump likes to boast about how well the US is doing against developed rivals, Europe has been growing just as fast in per capita terms this decade, and Japan has been growing slightly faster. In a rich country, that is fast enough to satisfy most people: Indeed, surveys show that Americans have rarely been more confident about the economy.
Slower growth in the working-age population also means less competition for jobs worldwide, which goes a long way to explaining why unemployment is now at record lows not only in the US but also in Germany and Japan. Surely that's not a bad thing.
Whatever politicians tell the public, their attempts to bring back the miracle years are ill advised. Growth in the economy is driven by growth in the number of workers and in output per worker, or productivity. But since the post-war surges of 1950s and 1960s, productivity growth has slowed, also defying government efforts to lift it.
For a time, the global economy kept motoring along anyway, fuelled by a surge in debt. In the 1980s, central banks began winning the war on inflation, which allowed them to drop interest rates sharply. Lower borrowing costs unleashed a worldwide binge that saw debt surging from 100 per cent of global gross domestic product in the late 1980s to 300 per cent by 2008.
Then the global financial crisis hit, ruining many private borrowers and lenders, many of whom are still wary of taking on new debt. After growing faster than the economy for three decades, debt growth in many countries, including the US, has fallen back in line with economic growth. Even China, the one major country that dodged the crisis and experienced a surge in lending after 2008, is now reluctant to build on the mountain of debt that already weighs down its economy.
So the post-war miracle is over. Economic growth is weighed down by the baby bust and the debt hangover. Yet, because economists continue to base forecasts on miracle rates of growth - 4 per cent for the world, 3 per cent for the US - policymakers keep fighting to hit these targets. This is very risky.
There are growing calls from economists on both the right and the left to lower interest rates, or increase government spending, to boost growth even if that risks higher inflation. At the Federal Reserve, too, there is an emerging view that letting inflation rise above 2 per cent, long considered a red line, may not be unwise.
The underlying assumption seems to be that policymakers must take action because 2 per cent GDP growth is intolerably slow. But must they? The confidence surveys suggest Americans are quite content with record-low unemployment, benign inflation and 1.4 per cent growth in GDP per capita. Why then the rush to pump more money into the economy, which risks rekindling its debt problems and inflation?
The world does not need more debt and more inflation to counter trends of declining population growth and high indebtedness.
Instead, economists need to adjust their forecasts and politicians need to rethink their polices to match this reality. Because trying to recreate a bygone golden age is a shaky way to build the future.
• Ruchir Sharma, a contributing opinion writer, is chief global strategist at Morgan Stanley Investment Management and author of, most recently, Democracy On The Road: A 25-Year Journey Through India.
A version of this article appeared in the print edition of The Straits Times on April 04, 2019, with the headline 'The miracle years are over. Get used to it'. Print Edition | Subscribe
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