Famed investor Jeremy Grantham just released his new quarterly letter to GMO clients, and it’s depressing.He writes that US economic growth will be less than 1 per cent for the next 40 years. This is in contrast to the above 3 per cent growth the economy has experienced for as long as we can remember.
People take Grantham seriously because he predicted bubbles in Japanese stocks in 1989, U.S. stocks in 2000, and most risk assets in 2007.
In his words:
The U.S. 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. Yet most business people (and the Fed) assume that economic growth will recover to its old rates.
Going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.
The bottom line for U.S. real growth, according to our forecast, is 0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050 (see table on Page 16). This is all done presuming no unexpected disasters, but also no heroics, just normal “muddling through.
Here are some of the reasons he cites for low future growth:
- Population growth peaked in the 1970s, and man-hours worked will grow at around 0.2% per year.
- Manufacturing productivity is high, but manufacturing is falling as a share of GDP. Currently it’s around 9 per cent of GDP. He expects it to fall to around 5 per cent by 2040.
- Service productivity is low and declining.
- Resource costs are rising, and are likely to accelerate. “If resources increase their costs at 9% a year, the U.S. 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.”
- Climate change will become increasingly unfavorable. He sees more floods and more damage to crops.
Grantham warns that policies that assume 3 per cent growth should be taken with scepticism:
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 1-in-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!
Here’s the table from the GMO letter:
Here are two charts Grantham provides that show how population is working against growth.
SEE ALSO: The Ultimate Guide To The Fiscal Cliff >
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