Since the global financial crisis (GFC), a number of trends have been worrying investors : aging demographics in both developed and emerging countries, increase of income inequality, decline in productivity growth, lack of investment from the corporate sector, and the slowdown of global trade.
Those trends explain why the global recovery has been slow for so long after 2008 and probably why it will not get back to its pre-2008 level.
And they are the backbone of the « secular stagnation » thesis popularized by Larry Summers and taken over by many banks around the world.
« An emerging consensus, echoing some of the sentiments of the secular stagnation hypothesis, argues that this five-year stagnation is not temporary, but instead reflects fundamental, long-run and persistent changes to the global economy », according to Goldman Sachs’ economists in a report datet September 28.
Is this the end of globalization or « peak trade » as we know it ?
Say GS’economists :
« While the trade growth rates of the 2000s may not return in the near term, suggestions that we have witnessed the ‘end of globalisation’ appear premature: we uncover little evidence to suggest that the forces that have driven a strengthening of cross-country trade links over the better part of the past century have weakened. » (…)
This conclusion impinges on some of the more extreme, long-run pessimism on emerging market economies and global growth that we frequently encounter. There is little to suggest that a long-run trade stagnation, with negative implications for EM assets and global growth, should be seen as the most-likely scenario going forward. »
Not all economists agree with that.
UBS recently estimated that global trade would grow by 3.75-4% a year in volume terms over the next 5 years if investment picks up, but by only 1.25% a year if it doesn’t.
Next to the growth in demand, other factors are contributing to this slow growth in global trade : « Factors such as changing texture of Chinese demand, shrinking global value chains, trade liberalisation reversing, and de-materialisation of demand are also compromising trend », they wrote in a report date October 18.
These figures compare with a 5.5% annual growth rate in volume over the last 30 years.
One of the key factors to monitor closely according to UBS is investment. Global demand explains 60% of the evolution of global trade, and investment is an important component of demand.
Is the slowdown of investment just a reflection of the lack of global growth and the poor financial conditions in an number of countries (which looks like a tautological argument BTW) ?
Actually several factors explain the lack of investment.
First is the political uncertainty post-GFC and the increase in regulation. Despite the fall in financial costs, corporations don’t increase their investment. One reason is that financial institutions are geared toward holding more sovereign debt, which squeezes out lending to corporations, especially to small and medium enterprises, which are the core of investment and job creation.
Second, the world has not deleveraged. A recent study by Morgan Stanley showed that the global level of debt as a % of GDP has actually increased over the last years, contradicting the idea that corporations and households have less debt now than before the GFC.
This view echos Richard Koo’s analysis of a balance sheet recession, a very insightful view that as long as leverage will be high, the private sector will not invest, even though interest rates are kept low thanks to non-conventional monetary policies.
Third, concentration level in a number of industries has reduced competition and has weighed down on investment. UBS says that’s the situation right now in the US. Large firms represent 30% of job creation in the US now vs 16% in 2002-2007.
Technological change is another factor, since the new technologies are created by companies that require less capital than the previous innovation phase. This looks paradoxical, since there are more and more computers, IT networks around the world today than years ago.
This idea is related to another one : that the boom in IT investments between 1995 and 2004 that lead to the TMT bubble and a huge burst of productivity was a « one off » event.
According to economists at the San Francisco Federal Reserve and other economists, productivity, growth and investment go through regimes and the current situation is one of low productivity, and those regimes seem to be correlated with the dynamics of global trade…
Last factor impacting investment is China and its transition from an industry-infrastructure led growth strategy to a more service-consumer orientated economy. After years of fast growth and urbanization, everything seems to be slowing down and is dependent upon the ability of Chinese authorities to support the economy in a wise manner.
Recent history (2015) shows that has not always been the case and the recent bubble in Chinese property market looks like another illustration of that.