{"id":16230,"date":"2018-05-02T07:05:47","date_gmt":"2018-05-02T07:05:47","guid":{"rendered":"http:\/\/thepatientinvestor.com\/?p=16230"},"modified":"2018-05-02T07:18:45","modified_gmt":"2018-05-02T07:18:45","slug":"is-gdp-doomed-to-low-growth","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2018\/05\/02\/is-gdp-doomed-to-low-growth\/","title":{"rendered":"Is GDP doomed to low growth?"},"content":{"rendered":"

GDP failed to rebound after the 2008 Financial Crisis, sinking into a period of stubborn low growth. Economic commentators have advanced many explanations for the causes, while the consensus seems to be that this is the new normal, with the global economy destined to decades of poor growth.<\/p>\n

\"Real<\/p>\n

This is a classic case of recency bias. Where observers attach the most value to recent observations and assume that the current state of affairs will continue for the foreseeable future. The inverse of the Dow 100,000<\/em> projections during the Dotcom bubble.<\/p>\n

Real GDP for Q1 2018 recorded 2.9% growth over the last 4 quarters. Not exactly shooting the lights out, but is the recent up-trend likely to continue?<\/p>\n

\"Real<\/p>\n

Neils Jensen from Absolute Return Partners does a good job of summarizing the arguments for low growth in his latest newsletter<\/a>:<\/p>\n

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The bear story<\/h2>\n

Putting my (very) long-term bearishness on fossil fuels aside for a moment, there is also a bear story with the potential to unfold in the short to medium-term, but that bear story is a very different one. It is a story about GDP growth likely to suffer as a consequence of the oil industry\u2019s insatiable appetite for working capital, which is presumably a function of the low hanging fruit having been picked already.<\/p>\n

In the US today, the oil industry ties up 31 times more capital per barrel of oil produced than it did in 1980, when we came out of the second oil crisis. ….Such a hefty capital requirement is a significant tax on economic growth. Think of it the following way. Capital is a major driver of productivity growth, which again is a key driver of economic growth. Capital tied up by the oil industry cannot be used to enhance productivity elsewhere, i.e. overall productivity growth suffers as more and more capital is \u2018confiscated\u2019 by the oil industry.<\/p>\n

I am tempted to remind you (yet again!) of one of the most important equations in the world of economics:<\/p>\n

\u2206GDP = \u2206Workforce + \u2206Productivity<\/p>\n

We already know that the workforce will decline in many countries in the years to come; hence productivity growth is the only solution to a world drowning in debt, if that debt is to be serviced. Why? Because we need economic growth to be able to service all that debt.<\/p>\n

Now, if productivity growth is going to suffer for years to come, all this fancy new stuff that we all count on to save our bacon (advanced robotics, artificial intelligence, etc.) may never be fully taken advantage of, because the money needed to make it happen won\u2019t be there. It is not a given but certainly a risk that shouldn\u2019t be ignored.<\/p>\n

….For that reason, we need to retire fossil fuels as quickly as possible. Ageing of society (older workers are less productive than their younger peers) and a global economy drowning in debt (servicing all that debt is immensely expensive, leaving less capital for productivity enhancing purposes) are widely perceived to be the two most important reasons why productivity growth is so pedestrian at present.<\/p>\n

I am not about to tell you that those two reasons are not important. They certainly are. However, the adverse impact the oil industry is having on overall productivity should not be underestimated.<\/p><\/blockquote>\n

I tend to take a simpler view, where I equate changes in GDP to changes in hours worked and in capital investment:<\/p>\n

\u2206GDP = \u2206Workforce + \u2206Capital<\/p>\n

Workers work harder if they are motivated or if there is a more efficient organizational structure, but these are a secondary influence on productivity when compared to capital investment.<\/p>\n

The chart below compares net capital formation by the corporate sector (over GDP) to real GDP growth. It is evident that GDP growth rises and falls in line with net capital formation (or investment as it is loosely termed) by corporations. <\/p>\n

\"Net<\/p>\n

A quick primer (with help from Wikipedia<\/a>):<\/p>\n