Earlier this year, we argued that secular stagnation wasn't dead. Since then, our conviction has only strengthened.
The world's developed economies are still stuck in an environment of low growth, low inflation, and low interest rates.
Confidence remains high, but the hard economic data is less buoyant
There's a schism within the investment world about where the global economy is going, with some analysts arguing a structural break from secular stagnation is under way.
The soft data—reflected in recent sentiment surveys—has lent some merit to that upbeat view. The U.S. National Federation of Independent Business (NFIB) Small Business Optimism Index spiked in November 2016 and has remained high since. This improved view is also reflected in Europe, where consumer and business confidence measures also jumped markedly.
The positive outlook has lifted global stocks, with improved earnings revisions helping extend the streak of gains in the United States, while the European markets have fared even better in recent months.
The soft data would suggest that the developed world is on the precipice of breaking out of the low growth, low inflation, and low rate environment we've been stuck in since the 2008 global financial crisis, but the hard economic data tells a different story altogether. U.S. consumers—who've driven virtually every economic recovery in the country's history—have started to show signs of strain.
Retail sales growth has been tepid for years, but it has weakened recently. New car registrations have fallen sharply in just a few months this year. Private consumption weakness can be explained in part by weak real wage growth in the United States. This trend is also plaguing Europe, with real wage growth remaining sluggish in Germany and weakening in the United Kingdom.
Oversupply of debt, liquidity, and labor continues to weigh on economic growth
Will investment increase as a result of the better expectations reflected in the soft data, or will confidence fizzle and fall in line with the weaker hard data? To answer this, we need to look at three of the bigger global drivers weighing on growth, which will likely override any fiscal or monetary stimulus measures.
- First, we continue to have an oversupply of debt, liquidity, cheap labor, and regulation, all of which weigh on economic growth.
- Second, without a material boost in what's essentially stagnant productivity growth, it's difficult to see potential GDP growth shifting into higher gear.
- Third, most developed and some key emerging economies are facing unfavorable demographics as their populations age, creating a drag on economic activity.
Our conclusion remains that the United States continues to be roughly a 2% growth economy, with the eurozone in aggregate at about 1.5% and Japan around 1%. We will no doubt have quarters of growth that exceed or fall short of these estimates, depending on fiscal and monetary policies in these regions, but overall we see little reason to believe that much has changed on the potential GDP growth front in any major developed economies. In our view, low growth, low inflation, and low interest rates are here to stay.