Jeremy Grantham: high US growth ‘gone forever’

Renowned for his pessimistic views Jeremy Grantham’s latest quarterly update will surely go down as one of his most depressing yet as he predicts the end of the US growth engine and hard times ahead.

The GMO founder and influential commentator’s latest quarterly update reads like a wake-up call to those in the financial community who are still of the belief the US will return to its former glory – and he didn’t even need to mention the US fiscal cliff.

‘The US GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever,’ he said.

‘Yet most business people (and the Fed) assume that economic growth will recover to its old rates.’

Going forward, he believes the US’ GDP growth is likely to be about only 1.4% a year, with adjusted growth about 0.9%.

Driving the low growth are several long-term trends, he says, poor demographics with an annual population growth at less than 0.5% going forward - down from 1.5% in the 1970.                            

Manufacturing is also no longer the driving force in the US economy and despite strong productivity, is on its way to accounting for only 5% by 2040. He also pointed to declining growth in service productivity for the next 20 years.

‘Critically, the tech boom and bust and the following housing boom and housing and financial busts helped camouflage the recent unpleasant economic development lying below the surface: the steady and important drop in long-term US growth.’

He also held little hope in US financial leaders effectively dealing with the issue in the short-term.

‘Investors should be wary of a Fed whose policy is premised on the idea that 3% growth for the U.S. is normal. Remember, it is led by a guy who couldn’t see a once in a 1200-year housing bubble!’