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!’
‘Keeping rates down until productivity surges above its last 30-year average or until American fertility rates leap upwards could be a very long wait!’
The rising cost of resources is also a major factor for the US’ growth levels going forward. Fracking will be helpful to growth for a few years, he said, but will be modest over longer periods.
‘If resources increase their costs at 9% a year, the US will reach a point where all of the growth generated by the economy is used up in simply obtaining enough resources to run the system.’
‘It would take just 11 years before the economic system would be in reverse! If, on the other hand, our resource productivity increases, or demand slows, cost increases may decelerate to 5% a year, giving us 31 years to get our act together.’
‘I believe, though, that it is highly unlikely that productivity will exceed the rising costs of resources and so the squeeze on growth will continue. The interaction between these two series will make for some incredibly volatile periods.’
Other developed economies will be in a similar situation to the US but are likely to end up through 2050 with growth about half a percent lower in population effects and therefore in total growth.
‘Similar forces will serve to drive down global growth from 4.5% at its recent peak in 2006 and 2007 to around 3% by 2030 and between 2.0% and 2.5% by 2050, all on the assumption that nothing unexpectedly serious goes wrong on the resource, climate, and “all other bumps in the road” categories.’
‘We need to move aggressively with capital – while we still have it – and brain power to completely re-tool energy, farming, and resource efficiency. We need to do all of this to buy time for our global population to gracefully decline. It can certainly be done.’
You can read Jeremy Grantham's latest full quarterly update by clicking here.