Big Five Factors Restraining World Growth by Kevin Lings

1. 2016 | 01
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STANLIB is an Authorised Financial Services Provider
THEBIGFIVEFACTORS
RESTRAININGWORLD
GROWTH
BY KEVIN LINGS,
STANLIB CHIEF
ECONOMIST
INTRODUCTION
In the immediate aftermath
of the Global Financial
Crisis (GFC) in 2008/2009
the world’s major central
banks, including the United
States Federal Reserve
(FED), the European
Central Bank (ECB) and
the Bank of England
(BOE) provided extensive
monetary policy relief.
This primarily included a
sharp reduction in interest
rates coupled with the
introduction of extensive
Quantitative Easing (QE).
At the time, the FED cut
interest rates from 5.25% to a
record low of 0.25% within a
period of less than a year. ECB
eventually dropped interest
rates from 4.25% to 0.25%
and the BOE lowered interest
rates from 5.00% to 0.50%.
More recently the BOE has
reduced rates by a further
25bps to a new record low
of 0.25%. This was the first
time the major central banks
provided such a coordinated
and emphatic monetary
policy response to an
economic crisis. In total, the
FED has to-date introduced
an additional USD 3.6 trillion
in financial market liquidity.
The BOE, ECB and the Bank
of Japan (BOJ) followed suit
with additional QE.
Despite this unprecedented
monetary stimulus, world
economic growth remains
well below its long-term
average. Furthermore,
economic growth forecasts
have been revised lower on a
very regular basis, including
the IMF’s world economic
outlook that is updated
ECONOMIC
GROWTH
FORECASTS
HAVE BEEN
REVISED
LOWER ON A
VERY REGULAR
BASIS,
INCLUDING THE
IMF’S WORLD
ECONOMIC
OUTLOOK THAT
IS UPDATED
QUARTERLY.
EURO-AREA, US, JAPAN AND UK OFFICIAL INTEREST RATES
UK
Euro-Area
US
Japan
Source: Bloomberg
% 6
5
6
5
6
5
5
07 08 09 10 11 12 13 14 15 16
WORLD TRADE VOLUMES
-22
-17
-12
-7
-2
3
8
13
18
23
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
%y/y
Average 7.8%y/y
Average 1.2%y/y
Source: International Monetary Fund

2. 2016 | 02
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quarterly. For example,
over the period from 1995
to 2005 the US economy
achieved an average Gross
Domestic Product (GDP)
growth rate of around 3.5%,
spiking to over 4% on a
regular basis. Since 2009, US
GDP growth has averaged a
mere 1.5% p.a and is forecast
to grow at only 1.7% in 2016.
A similar argument can be
made for economic growth
in the United Kingdom as well
as the Euro-area.
Clearlytheextensive
andprolongedmonetary
policyresponsefromthe
majorcentralbankshas
notproducedtherebound
ineconomicgrowthmost
analystsandcentralbankers
anticipated.Thisraisesakey
question,“whatisrestraining
worldgrowth?”Itisclearlynot
thelevelofinterestratesora
lackofliquidityinthefinancial
system.
After extensive research, it is
possible to identify at least
five major factors restraining
world growth.
1.
AN INCREASE IN
GLOBAL TRADE
PROTECTION
Many countries, including
the United States, United
Kingdom and Euro-area have
experienced a rise in right-
wing politics in recent years
and a clamor for increased
protectionism. This is partly
in response to the perceived
ill-effects associated with
globalisation, the escalation
of the migrant crisis in Europe
and the ongoing erosion of
manufacturing activity in
many developed markets.
The result is that the G20
countries, according to the
World Trade Organisation
(WTO) have more than
tripled their number of trade
restrictions since the GFC.
This, unsurprisingly, has
contributed enormously to
a slowdown in the rate of
growth of world trade. In fact
the volume of world trade
has slowed from a growth
rate of almost 8% in the years
prior to the GFC to a mere
1.5% in 2016. This would be
the slowest pace of growth
in global trade since the
financial crisis of 2009.
Historically strong trade
growth has been a sign of
strong economic growth, as
trade has provided a way for
developing and emerging
economies to grow quickly
and strong import growth
has been associated with
faster growth in developed
countries. While the benefits
of trade are clear, it is also
clear that the benefits have
to be shared more widely.
The slowdown in world
trade is very closely related
to the overall slowdown in
world economic growth.
Consequently, the increase
in trade protectionism has
contributed to the somewhat
sluggish and disappointing
global economic
environment.
2.
A LACK OF FIXED
INVESTMENT
ACTIVITY
In most developed
economies the cost of
capital is at a historical
low. This is partly reflected
in corporate bond yields,
but it is also reflected in
the cost of bank debt.
Despite this, the sharp pull-
back in fixed investment
that occurred during the
GFC has largely been
sustained in recent years;
including infrastructural
development by the public
sector. For example, over
the period from 1990 to
2008 fixed investment
activity in the developed
world amounted to an
average of 23.3% of GDP.
Since the GFC, this ratio has
dropped to an average of
only 20.3%.
This three percentage point
reduction in fixed investment
activity amounts to a
staggering USD 1.3 trillion less
fixed investment activity at
2016 prices. A similar trend
has occurred in the Euro-
area.
Without a relatively strong rise
in fixed investment spending,
including infrastructural
development, it is hard for
most economies to generate
a vibrant and sustained
increase in employment that
leads to much more vibrant
economic growth across a
broad range of economic
sectors.
3.
DEPENDENCY RATIOS
IN DEVELOPED
MARKETS
Globally, life expectancy has
been trending higher for a
number of decades and was
recently recorded at just
over 70 years having been
as low as 45 years shortly
after the Second World
War. This is understandable
given regular breakthroughs
in medicine as well as a
general increase in access to
modern medicine.
Onitsown,theriseinlife
expectancywouldnot
necessarilybeexpected
torestrainglobalgrowth.
However,crucially,there
hasbeenaremarkable
shiftindependencyratios,
especiallyinthedeveloped
world.Forexample,theyouth
dependencyratio(thatisthe
numberofdependents,aged
zeroto14asapercentage
ofthetotalpopulationaged
15to64)hasfallensharply
fromaround48%in1960
toaround26%in2016.This
hasoccurred,primarily,
becausethebirthratehas
fallenin-linewiththegrowthin
averagehouseholdincomes.
Incontrast,theelderly
dependencyratio(thatisthe
numberofdependentsover
theageof65asapercentage
ofthetotalpopulation,aged
15to64),hasrisensharply
fromamere14%in1960to
25%in2016.
This change in the
composition of the total
DEVELOPED MARKETS FIXED INVESTMENT AS % OF GDP
17
18
19
20
21
22
23
24
25
26
27
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
% of GDP
Ave 1990 - 2008
Ave 2009 - 2015
Source: International Monetary Fund

3. 2016 | 03
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dependency ratio in the
developed world is having a
profound impact on global
growth. This includes the
lack of young entrants to
the labour market coupled
with the need to divert
an increasing amount of
resources into supporting
the elderly population. The
net result is a change in the
composition of economic
growth (for example more
spending on healthcare) as
well as an overall restraint
on growth given that older
people use credit much
more sparingly compared
with newly employed
younger people.
4.
THEREBALANCING
OF THE CHINESE
ECONOMY
Chinaisintheprocessof
rebalancingitseconomy.
ThisimpliesthatChinais
endeavouringtoshiftthe
composition of itseconomy
awayfromfixedinvestment
activityandtowardsa
greaterroleforhousehold
consumption, including
theconsumptionofboth
goodsandservices.This
fundamental shiftin structure
oftheChineseeconomyis
alreadywelladvancedand
isexpectedtocontinuefor
many years.
WhilethegrowthinChinese
householdconsumption
willbewidelyapplauded
internationally,theslowdown
intherateofgrowthin
fixedinvestmentactivityis
havinga profoundimpacton
manyemergingeconomies,
especiallycommodity
producers.Thisisbecause
theslowdowninfixed
investmentactivity (coupled
witha relativelyrapidrisein
thecostofmanufacturing
productioninChina)hasled
toamoderationintherateof
growthofindustrialactivity
andasharpfall-offinimport
demand–especiallythe
importationofcommodities.
Thenetresulthasbeen
lowercommodityprices,
whichhasunderminedthe
economicperformanceof
manyemergingeconomies,
includingSouthAfrica.
Theprocessofrebalancing
theChineseeconomyisvital
foritssustainedeconomic
success. IfChinaisable
tosuccessfullytransition
fromaninvestmentbased
economyintoaneconomy
thathasahealthymixofboth
consumptionandinvestment
itwilleasilybecomethe
largesteconomyintheword.
However,givenhowimportant
China’seconomicgrowth
hasbeentocommodity
DEVELOPED MARKETS AGE DEPENDENCY RATIO
(Ratio of Working age Population to Non-Working age Population)
Source: US Census Bureau
Age 65+ as % of working age (rhs)
Age less than 16 as %
of working age (lhs)
10
12
14
16
18
20
22
24
26
20
24
28
32
36
40
44
48
52
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
CHINA IMPORTS
-40
-30
-20
-10
0
10
20
30
40
50
60
70
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
% y/y, 3-month moving average, USD
Source: National Bureau of Statistics of China
THERE HAS
BEEN A
REMARKABLE
SHIFT IN
DEPENDENCY
RATIOS,
ESPECIALLY
IN THE
DEVELOPED
WORLD. FOR
EXAMPLE,
THE YOUTH
DEPENDENCY
RATIO HAS
FALLEN
SHARPLY
FROM
AROUND 48%
IN 1960 TO
AROUND 26%
IN 2016. IN
CONTRAST,
THE ELDERLY
DEPENDENCY
RATIO
HAS RISEN
SHARPLY
FROM A MERE
14% IN 1960
TO 25% IN
2016.

4. 2016 | 04
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China’s
economic
rebalancing is
undermining
world
economic
growth in the
short-term,
especially
emerging
economies.
of respondents
think that there is a
86%
Source: World Economic Forum
in the world
today
leadership
crisis
producersinrecentyears,
China’seconomicrebalancing
isunderminingworld
economicgrowthintheshort-
term,especiallyemerging
economies.
5.
A GLOBAL LACK OF
CONFIDENCE
The level of economic
sentiment, measured on a
global basis, is noticeably
lower now compared with
the level of confidence that
prevailed prior to the GFC.
For example the Sentix
index, which measures
confidence levels in the
major economies, averaged
an index level of 25 prior
to the GFC. Since the GFC,
the indicator has averaged
around eight index points.
There are a wide range of
factors that help to explain
the lower average level of
economic sentiment. This
includes a crisis of leadership,
especially political leadership.
In fact, according to the
World Economic Forum’s
Global Leadership Index for
2015, 86% of respondents
think there is a leadership
crisis in the world. There are
also numerous research
reports highlighting the
growing wealth divide in the
world, as well as rising levels
of corruption. Transparency
International highlighted
in their 2015 report on
corruption that more than six
billion live in a country that is
considered highly corrupt.
The combination of increased
corruption, a growing wealth
divide and a lack of effective
leadership has clearly
combined to undermine
economic sentiment on a
global scale. Lower levels
of confidence are typically
associated with an increased
reluctance to undertake large
purchases (for example the
purchase of a house), but also
a reluctance by the business
sector to invest in additional
machinery and equipment.
CONCLUSION
Eight years after the GFC, it is
evident that although central
banks were very effective in
responding to the financial
crisis, the key factors holding
back the world economy
today are largely unrelated to
the level of interest rates or
the amount of QE on offer.
Instead, there needs to be
a renewed focus on other
critical policy measures
such as trade, competition,
labour, industrial and
fiscal policy. This includes
the development of vital
economic infrastructure.
Under current
circumstances, all of these
policy areas have the
potential to lift world growth
much more effectively than
further monetary stimulus.
GLOBAL ECONOMIC SENTIMENT (SENTIX INDEX)
Sentix global confidence index
-50
-40
-30
-20
-10
0
10
20
30
40
50
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Confidence prior to financial crisis
Confidence post financial crisis
Source:Sentix