Thursday, November 15, 2012

The end of growth?

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The end of growth has suddenly become a fashionable topic. You see it in books and magazine articles, all arguing that we can no longer expect growth of the type once taken for granted.

Sustainability provides one thread in the discussion. Its proponents argue that growth has become unsustainable on resource and environmental grounds. A second thread focuses on technology. The great technological gains that began with the first industrial revolution and which drove economic growth and transformed life have been exhausted. Demographic change and the consequent aging of the population in many countries provide a third thread. We have fewer workers relative to the size of the population, further dragging on growth.

In combination, these forces reduce the return on all types of investment. The golden days are behind us. It’s quite enough to make one splutter into the morning coffee! But are the arguments right? The short answer is partially yes, but mainly no.

There was always something a bit silly about our overall obsession with short term growth. Just adding together all the growth targets set in executive offices and board rooms across the country should have shown that. There was no way that the economy could grow fast enough to allow all or even a majority to achieve target. It just couldn’t happen. Yet we persisted in insisting that the emperor had clothes, that somehow targets would be achieved.

The current emphasis on sustainability is actually a useful corrective to those past excesses. But does this mean that the age of growth is over? I think that the answer is clearly no.

Just at present, the global economy is marked by two dominant changes, one short term, the other long.

In the short term, global economic activity is being dragged down by the need to clear the excesses of our immediate past. Low growth is the price we have to pay for those excesses. This isn’t new. The stagflation that marked the 1970s was the price paid for the excesses of the previous decade. The indigestion that resulted was painful, but it did ease. The same thing will happen now.

The longer term trend is far more profound because it involves a fundamental rebalancing in the global economy. It’s a structural shift as the rest of the world starts to catch up with the growth previously experienced in the west. Growth in the mature economies will be low simply because the economic base is so much larger. Further, those countries are also the ones most affected by aging populations. But, overall, longer term global growth is likely to continue at much the same average levels that we have seen over the last one hundred years.

Will the composition of that growth be the same as it has been? Almost certainly not, but then it never is, for the pattern changes all the time.

And what does this mean for Australia? Again, we are in the right place at the right time. The food and raw materials we produce will continue to be in demand. Our service sectors will benefit from proximity to higher growth areas. In all, we remain the lucky country!

Note to readers: This column appeared in the November/December edition of Australian Business Solutions magazine. It's not on-line, so I have re-published it here.

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