The Growth Conundrum


The upswing since the financial crisis has been disappointing. Growth has been poor, both in relation to the previous business cycles and economists' forecasts.

This decade around the time of New Year there have always been expectations that the economic growth will finally return to good old levels during the coming year.

Then typically there would be a series of disappointments followed by economists being forced to cut their growth forecasts throughout the year. There have been various reasons for that.

The scapegoats

Bad winter weather has often been on the scapegoat list, as well as the repeated debt crises in the Eurozone.

Moreover, for several years high oil prices were highlighted as a major brake on the world economy. This year the low oil price is the problem.

The dive in the price of oil and other commodities has punctured the economy of Russia and Brazil, and the negative contribution to growth from these countries has not been offset by a corresponding boom in commodity-importing countries.

Although lower commodity prices overall should be good news for the world economy, 2015 was a new year on the list of disappointments. This year the global growth will be very moderate and marginally lower than last year.

The growth conundrum

The inability of Western economies to get back to a "normal" speed after the financial crisis represents the greatest riddle in economics right now.

Some believe that the reason for the apparent limited growth rate is chronically weak demand. If this is the case, the solution is to escalate counter-cyclical policy through for example large-scale infrastructure projects.

Others point to poor productivity. The big technological breakthroughs may be behind us, and this may have reduced the economy's growth potential permanently.

Finally some argue that there are measurement problems. Much of the innovation happening today is in software, the so-called Internet 2.0 revolution.

To measure the economic output from Twitter, Facebook, Tinder, Google Maps, free news on the internet and so on is much harder than to quantify the production of steel and cement.

Undeserved bad reputation?

While growth has been disappointing after the financial crisis, the upswing has not been as bad when measured on the basis of other criteria. One of the things that can be mentioned here is that the labor market has actually done better that normal. During the past few years, the fall in the unemployment in the G7 area has been one of the biggest and sharpest in history.

The rally on the leading western stock exchanges after the financial crisis has also not been moderate. Particularly IT and technology stocks have done excellent.

The boom in Internet stocks gives support to the view that economic growth is underestimated as a result of measurement problems. On the other hand, the sharp fall in unemployment points means that there is likely not a general demand problem in the world economy.

Therefore, I suspect that the disappointing growth after the financial crisis is caused primarily by a combination of diminished productivity and measurement problems.

What all of this means for the financial markets going forward, I will come back to later.

Soon: climate conference in Paris

The UN’s climate conference in Paris starts on November 30th. We are betting that this will lead to increased interest in renewable energy, and therefore put REC into the Dovre portfolio.


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