The alarm bells ring non-stop now. On Thursday, it was the Organization for Economic Co-operation and Development’s turn to warn that “collective policy action is urgent” to rescue a global economy that seems to be hurtling toward an abyss of ever-diminishing growth expectations.
“Will somebody please do something?” is the implicit demand made of policy-makers by the OECD and other global economy-watchers as governments and central banks ponder everything from massive fiscal stimulus to negative interest rates to prevent what may be unpreventable.
Recessions happen, usually like clockwork. They’re even harder to alleviate when many countries have already maxed out their fiscal and monetary policy options, as is now the case. But what if the problems of slow growth are too big for even the most creative minds to solve?
Ruchir Sharma, the head of emerging markets and global macro at Morgan Stanley Investment Management, warns that policy-makers have been looking in all the wrong places to explain what has become the weakest global economic recovery in postwar history. The causes aren’t high public and private indebtedness, income inequality or overcautious investors, although those factors don’t help. The real problem is a dramatic slowdown in labour market growth rates around the world.
It seems counterintuitive to be worrying about labour market shortages when automation is rendering more and more jobs redundant and unemployment remains at near-record levels in most of Europe. Even the U.S. unemployment rate, which is at an eight-year low of 4.9 per cent, cannot mask the fact that the participation rate (the percentage of working-age Americans in the labour force) is at a four-decade low, leaving millions of potential workers idling on the sidelines.
But by exhaustively tracking population and gross domestic product growth over one-decade periods since 1960, Mr. Sharma comes to a several sobering conclusions. One is that “explosions in the number of workers deserve a great deal of credit for economic miracles.” Another, he writes in an article published this week in Foreign Affairs, is that “a world with fewer fast-growing working-age populations will experience fewer economic miracles.”
Between 1960 and 2005, the expansion of the labour force and rising productivity determined growth rates almost everywhere. During that 45-year period, the global labour force grew at an average annual rate of 1.8 per cent. Since 2005, the rate has slipped to 1.1 per cent and is expected to fall further in all but a few outlying nations (such as Nigeria) as the consequences of a decades-long decline in fertility rates leave even emerging economies facing dwindling influxes of new workers.
The West has been resigned to economic challenges posed by aging populations for some time now. So it seems surprising that anyone would be surprised that developed countries are struggling to achieve pre-2008 levels of GDP growth. But the worst is to come, as emerging markets that have been driving global demand face slower population growth of their own.
“Over the next five years, the working-age population growth rate will likely dip below the 2-per-cent threshold in all the major emerging economies,” Mr. Sharma says. “In Brazil, India, Indonesia and Mexico, it is expected to fall to 1.5 per cent or less. And in China, Poland, Russia and Thailand, the working-age population is expected to shrink.” The most worrying slowdown is China’s, with “dire” implications for the rest of the world. In the past five years, Mr. Sharma notes, China alone accounted for a third of global growth.
It’s not all bad. “Neo-Malthusian” fears of food shortages won’t materialize, despite an increase in the global population to 9.7-billion in 2050 from 7.4-billion today. That’s because much of the increase relates to longer lifespans; the old consume far fewer calories than the young.
What’s more, automation could be a saving grace for some economies. “Neo-Luddite warnings about robots stealing human jobs could prove also beside the point,” Mr. Sharma says. “It is possible the robots will arrive just in time to ease the threat posed by depopulation.”
But all that may be small consolation for economies such as Canada’s that have been counting on global trade agreements to reach more consumers than slow-growing domestic or regional markets can provide. The BRIC economies’ appetite for imports, for instance, will be far less voracious than had been hoped.
This is all worth considering as governments and central banks face pressure to embrace more audacious, and potentially risky, policies to stimulate growth. Some trends are too big to counter, and going to extraordinary lengths to try might even make things worse.Report Typo/Error