Recession risk is rising and trend global productivity and economic growth rates are falling. From the ECRI at business cycle.com:
The risk of a global recession is edging up, as the global slowdown we first noted last fall continues (ICO Essentials, September 2015). This danger is heightened because longer-term trend growth is slowing in every Group of Seven (G7) economy, as dictated by simple math: growth in output per hour, i.e., labor productivity – plus growth in the potential labor force – a proxy for hours worked – adding up to real GDP growth.
As we laid out over a year ago (USCO Essentials, June 2015), this simple combination of productivity and demographic trends reveals that U.S. trend GDP growth is converging toward 1%. This is reminiscent of Japan during its “lost decades,” where average annual real GDP growth registered just ¾%, which is why we have cautioned that the U.S. is “becoming Japan” (USCO Essentials, February 2016)and (ICO, July 2013).
Expanding this analysis to the rest of the G7, we find that every economy is effectively becoming Japan, and the sharpest slowdowns are happening outside North America. Thus, as trend growth falls in the world’s largest advanced economies amid the ongoing global slowdown, the threat of a global recession is growing.
In the face of slowing U.S. trend growth, the Fed had hoped that the U.S. economy would recover to earlier levels of trend growth, provided they could find the right size and mix of quantitative easing and low interest rate policies. We dubbed this effort, a “Grand Experiment,” which has served only to pull demand forward, ultimately depleting future demand and failing to achieve the Fed’s objective. Other G7 central banks have arguably made even greater attempts at ginning up growth, but with even less to show for it.
To make our simple math analysis consistent internationally, we used comparable annual data for productivity, labor force, and potential labor force for each G7 country. Then, we examined the data for the half-century preceding the Global Financial Crisis (GFC). Separately, we examined labor productivity growth in the 2010-15 period and potential labor force growth in the 2015-20 period to estimate trend growth in the latter period. As productivity is notoriously difficult to predict, and there is no compelling reason to expect it to change significantly in the near term, we used the last five years’ average productivity growth as the best available estimate for the next few years. The results for the U.S. were quite consistent with our original findings.
Outside of North America, trend growth will likely be even worse. Indeed, the German outlook is substantially weaker than that of the major developed English-speaking economies. While average productivity growth was relatively high at 0.8% from 2010-15, as shown in the chart (upper panel, red line), with negative 0.4% annualized potential labor force growth for 2015-20 (lower panel, red line), trend GDP growth is expected to be only 0.4% over the second half of this decade. To what extent Brexit will change the growth trajectory remains to be seen, but it is unlikely to help.
To continue reading: ECRI’s Simple Math Goes Global