Global markets were seized by fear last week that trade wars were slowing growth in Germany, China and the United States. But the story here is bigger than President Trump and his tariffs.
The post-war miracle is over. Since the financial crisis of 2008, the world economy has been struggling against four headwinds: deglobalisation of trade, depopulation as labour forces shrink, declining productivity, and a debt burden as high now as it was right before the crisis.
No major economy is growing as fast as it was before 2008. Not one is growing faster than 10 per cent, the rate experienced by the Asian “miracle economies” before the crisis. In almost every country, the national discussion focuses on what must be done to revive growth and ignores the fact that the slowdown is driven by forces beyond any one government’s control.
Instead of dooming ourselves to serial disappointment and fruitless stimulus campaigns, we need to redefine economic success and failure.
The old truisms don’t hold water
Germany is one of at least five major economies on the verge of a recession, which is typically defined as two consecutive quarters of negative growth. But the real issue is whether that definition still makes sense in a country with a shrinking labour force like Germany’s.
Its working population is expected to fall to 47 million from 54 million by 2039. Forty-six countries around the world — including China — now have shrinking populations.
Demographics are usually the main driver of economic growth, so it is basically inevitable that these countries will now grow at a much slower pace. And we are not talking about minor population declines. Projections for 2040 show China’s working-age population falling by 114 million.
With a shrinking labour force, these economies will inevitably slow and, at times, contract. To keep calling two negative quarters in a row a “recession” implies that this outcome is somehow abnormal or unhealthy. That will no longer be the case.
Better parameters needed
The discussion about economic health needs to shift to measures that better capture satisfaction and contentment, like per capita income growth. In countries with shrinking populations, per capita incomes can continue to grow so long as the economy is shrinking less rapidly than the population.
This helps explain why, for example, Japan isn’t facing more social unrest. Its economy has grown much more slowly than that of the US in this decade, but because the population is shrinking its per capita income has grown just as fast as America’s — around 1.5 per cent per year.
Shrinking populations also help explain why unemployment is at or near multi-decade lows, even in countries with serious growth worries. Gainfully employed Germans and Japanese won’t really feel as if their countries are in a slump until per capita GDP growth turns negative — which may prove to be a more useful way to think about recessions in this new era.
Defining what constitutes growth
Many emerging countries still aspire to the double-digit growth rates. As growth downshifts, even little miracles are disappearing. Before the 2010s, it was common for one in every five economies to be growing at 7 per cent or more annually. Now, among the world’s 200 economies, just eight, or one in 25, are on track to grow 7 per cent this year. Most of those are small economies in Africa.
When the news emerged that China’s economy had slowed to just 6 per cent, a new low, many investors and analysts rang the alarm bells. But the reality is that economies rarely grow as fast as 6 per cent if the population is not booming too. Not only did China’s working-age population growth turn negative in 2016, but it is one of the countries hardest hit by slumping trade, declining productivity and heavy debts.
If the Chinese economy really were growing at 6 per cent in this environment, it would be cause for celebration, not alarm.
The benchmark for rapid growth should come down to 5 per cent for emerging countries, to between and 3-4 per cent for middle-income countries, and to between 1-2 per cent for developed economies. And that should just be the start to how economists and investors redefine economic success.
This rethink is overdue. The number of countries with shrinking populations is expected to rise to 67 from 46 by 2040, and the decline in productivity growth is in many ways reinforced by heavy debt burdens and rising trade barriers.
Redefining the standard of economic success could help cure many countries of irrational anxieties about “slow” growth, and make the world a calmer place.