GDP growth closer to 'normal' than 'stagnant' in the next five years
In today's Fundamentals briefing, LGIM economist James Carrick discussed advanced economy growth, which has been running below its long-run average of 2.5% for the past five years. To assess the prospects for the next five years, James examined the fundamental drivers of growth: demographics, debt, regulations, energy, globalisation and technology.
"The optimists among us argue that weaker growth over the past five years is largely due to cyclical headwinds which should fade as economies heal from the financial crisis. The pessimists see structural impediments to growth, which increase the risk of recurring crises. We see merit to both sides of the debate," said James.
"Deteriorating demographics and higher debt levels are undoubtedly a headwind for growth over the next few years" explained James, "although these effects are being partially mitigated by higher retirement ages and austerity measures respectively".
One factor deemed key to future growth is an acceleration of capital expenditure as unemployment continues to fall. In a deregulated labour market, workers are more flexible than machines. It's easier to lay off staff in a broad economic downturn than to sell an underutilised building or machine. Firms laid off workers during the recession and are now hiring again. As wage costs increase, James expects firms to start raising capital expenditure once more.
"While we still have concerns on demographics and debt, we have seen positive signs from technological progress, particularly in energy and software. When combined with deregulation and improving credit conditions, we think that advanced economic growth will remain below average over the medium term, but closer to ‘normal' than ‘stagnation'" said James.
To download the full document, "Fundamentals: Rise of the machines", click here: Fundamentals July 2015 (PDF: 1630KB)
Notes to editors
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