Although admittedly nowhere near recent Chinese growth, the duration and consistency was remarkable. Annual growth of 3.3 per cent for 100 years will multiply your income by 26 times.
But 1880 to 1980 appears, with hindsight, to have been the Golden Century. In the 20 years from 1980 to 2000, the growth of GDP slowed materially (and was skewed to the top 10 per cent and 1 per cent in a way that had not been seen for 70 years), but still the country was compounding at a solid enough 2.8 per cent a year, a rate that in a century would still compound to 16 times.
For the past 13 years, in contrast, the growth has really slowed – to only 1.4 per cent a year, in spite of a considerable bounce-back in capacity utilisation since the bottom of the financial crash in 2009. To put it into perspective, 1.4 per cent a year turns a dollar of income in 100 years not into $26 or $16, but into $4.
An important question here is how integrated is this substantial and unprecedented economic slowdown into everyone’s thinking, from average businessmen to the economic experts of the IMF and the Fed? The answer seems clear: not very.
But this data, the accuracy of which is not challenged as far as I know, is the background for my recent forecast that the next 30 years of US GDP growth is likely to look like 1.5 per cent, on current GDP accounting; a growth rate that is slightly higher than that experienced in the past 13 years.
In spite of this comparison, my forecast of late last year was generally treated as unreasonably bearish, although no-one really challenged the two basic propositions on which it was based: first, a growth in future person-hours offered to the workforce of 0.2 per cent a year based on estimates of the US Bureau of Census; and second, that the productivity of the past 30 years of 1.3 per cent a year would be sustained, which, given the steady decline in the share of the subset of manufacturing, a subset of the total with much higher productivity gains (more than 3 per cent a year) than the average, is actually a friendly assumption.
At this point I can’t resist reviewing once again my forecast in 2009 of ‘seven lean years’, in which I suggested 2 per cent a year would be a hard level to reach or exceed. And it will turn out that way. But the biblical idea of seven lean years, which felt so brave back in 2009 seems likely to be a red herring: the time period would be better left open-ended.
‘Permanent lean years’ is not as memorable, but probably more accurate. Let me add that ‘lean’ is only a useful concept to compare with the Golden Century. Growth of 1.5 per cent a year is not that bad.
It is, however, important that we readjust our mental targets unless we want to enter an era of perpetual disappointment. False optimism leads to very poor investment decisions. It will also encourage yet more dangerous policies at the Fed.
We can imagine, for example, in 30 years some ‘son of Yellen’, as it were, introducing QE 27 in a vain attempt to squeeze blood out of stones. But long before then, I fear an overstimulated system will have bitten us a few more times on the leg.
Jeremy Grantham is co-founder and chief investment strategist at GMO
