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Welcome To The Decade Of Slow Economic Growth

Welcome To The Decade Of Slow Economic Growth thumbnail

In the last 100 years, multiple factors were in play to ensure economic growth.

Those factors are disappearing quickly.

Returns will be much smaller going forward.

The world economy has grown tremendously in the last 100 years driven by multiple factors such as population growth, technological advancements and rapid urbanization, not to mention a healthy dose of inflation (with exceptions) throughout the time. We expect the global economic growth to slow down not temporarily but in a more permanent fashion moving forward as these factors are changing.

Investors would benefit from adjusting their portfolios accordingly and allocate more of their portfolios towards defensive positions and keep their cash reserves growing in case better buying opportunities arise. Let’s discuss some of the reasons why we expect the global economy to grow at a smaller pace moving forward.

Population factors

The world population has grown tremendously from about 1.5 billion to nearly 8 billion in the last 100 years, driven by major advancements in medicine and urban lifestyles, which has been driving global economic growth. Population growth can drive economic growth in multiple ways. First, it ensures that there is an ever-growing market for goods and services (demand side) as well as an ever-growing pool of employees who are ready to take on jobs or start their own companies (supply side).

Population growth also tends to be good for the growth of economy from a microeconomic standpoint. When people have more kids, they need bigger houses, bigger cars, more furniture and more groceries. If people have fewer kids, they need fewer things and they don’t have to spend much. Obviously, going on a vacation or eating out would cost a lot less for a smaller family with fewer kids, which reduces the revenue potential for industries such as the service industry.

Now the world’s population is growing at a much smaller rate because people are having fewer babies than any time in the history. Earth’s population growth rate slowed down from high 2% range to low 1% range and this is mostly driven by Africa at the moment. If we exclude Africa and a few select countries, the earth’s population is not growing much at all anymore. If the global economy is expected to grow at a rate of 3%, but the world’s population grows at a rate of less than 1%, this makes things harder.

Fertility rates have been dropping in the developed countries for nearly 40 years, but they dipped in 2008 when we had our last economic crisis. Many people thought that the dip was temporary due to the recession, but now 11 years later we are starting to see that it is a rather permanent change. We need a fertility rate of 2.1 just to keep the size of the population constant. The US enjoys a fertility rate of 1.8 and this is one of the highest in the developed world. In Asia, Korea’s fertility rate is 1.1, Japan’s rate is 1.4 and China is looking at 1.6 thanks to the one-child policy. In Europe, Germany is 1.6, Italy is looking at 1.3 and most European countries range between 1.3 and 1.8. If it wasn’t for immigration, Europe would be losing population, but it is barely keeping its population size constant just like its economy, which hasn’t seen any meaningful growth since the mid-2000s.

The only place in the world where the population growth rate seems to be high is Africa, but the continent lacks the infrastructure and investments to fuel any meaningful economic growth similar to what China and India achieved since the 1980s.

Urbanization factors

When population growth fails to fuel growth of an economy, urbanization can help. One great example of this is China, which saw its urbanization rate quadruple since 1980 and this brought amazing economic growth despite slowing population growth. Urbanization results in many benefits including production efficiencies, which drives combined wealth over time.

Here is the problem though: the developed and developing nations are already mostly urbanized and there isn’t much more room for growth. Let’s take the US where 270 million out of the population of 320 million are urbanized and the rest of the population have little interest in moving to the cities. China’s GDP growth of 6-8% is pretty much in line with its urbanization growth rate, but once this slows down, the country’s growth rate will also have to come down, and we are already seeing signs of this happening. Currently roughly 60% of China is urbanized with possibly room for another 20%.

Ironically, urbanization slows down a nation’s population growth rate even though it helps with economic expansion because the urban population, on average, has fewer children and smaller families across the world. Urban people are more likely to get married at a later age or never at all and more likely to have only 1 child or none at all. Basically, when a country undergoes urbanization quickly, it gives up population growth in favor of short-term economic expansion.


Another factor that will contribute to slower economic growth in the future is the inflation rate. While inflation is considered a “scary” word, a healthy dose of inflation (around 2%) can help drive economic growth by increasing wages and spending across the board. Currently, with all the central bank money printing and low interest environments around the world, the inflation rates are looking particularly anemic.

As long as companies continue to spend their money on buybacks instead of growing their core businesses, inflation rates will continue to be tamed, which will limit the economic growth we can achieve.

Technological advancements

Technological advancements certainly help economic growth by increasing output of goods. Just look at the global food production which multiplied over the years. According to World Bank, just between 1960 and now, the global food production almost quadrupled. A hundred years ago we had trouble feeding 1.5 billion people while now we can comfortably feed 8 billion people even though the average diet today has far more calories than it had 100 years ago. This is nothing short of a miracle.

On the flip side, we are passing a point where technological advancements might be playing against economic growth. Robotics, artificial intelligence, and machine learning are likely to replace many human jobs, not only those that rely on repetitive manual labor, but even those relatively more complex jobs such as driving cars, trucks and buses. Meanwhile, companies are getting more efficient and learning to do more with less resources, which might help their margins but hurt global economic growth in the long term.

Monetary policies

Currently, monetary policies in developed countries is so accommodating that there isn’t much room for them to get even more accommodating. With interest rates near zero in America, Europe and Japan, there isn’t much central banks can do to jump start their economy if things go south (even though they seem to be good at inflating asset prices without driving actual economic growth).

So if the world population is not growing anymore and our markets can’t expand to a larger number of customers and workers, interest rates can’t go much lower, urbanization rates have little room to grow, technology is actually reducing the need for more workers, not to mention an ever-aging world population, what exactly will drive economic growth in the next decade or so?

Slowing economic growth wouldn’t be a problem if valuations weren’t so rich, but the current stock valuations are already pricing in strong future growth that might or might not actually happen. One valuation metric (apart from traditional metrics such as the P/E ratio) I like to look at is dividend payout ratios of some well-known global customer staple stocks because this can tell me the lengths these companies go to in order to sustain or grow their dividends. I pulled a small sample of these companies in the chart below, and as you can see, dividend payout ratios range from 60% to 105%, which means these companies are overextending themselves as it is and any future dividend growth will be very difficult to achieve moving forward unless an economic miracle happens or inflation suddenly blows up.

Another metric I’d like to look at is debt of companies. In the last 10 years, central banks around the world gave companies easy access to cheap money and companies used this money to drive stock buybacks rather than invest into their businesses. Well, this reduced the share counts in most companies but increased debt levels tremendously.

Let’s look at Coca-Cola (KO) just as an example. In the last 10 years, the company’s share count dropped significantly while its total debt and debt-to-equity ratios skyrocketed. Why? You guessed it correctly: the company took on debt to buy back more shares. This is not just a Coca-Cola problem as we see this in almost every blue chip out there.

Corporate debt has been rising across the board for the last decade. This behavior was driven by easy money policies of central banks around the world and these policies didn’t help the average person much. In the graph below, you’ll see the non-financial corporate debt of American companies collectively. Companies will continue to engage in this behavior for as long as they can get away with, which means we’ll be seeing anemic growth and low capital investments for a long time to come.

Source: St. Louis Fed

So if companies are already loaded with debt, allocating more and more of their earnings to dividends and buybacks, the population growth is slowing and all the trade wars going on around the world, what exactly will fuel further economic growth? Will central banks, governments and corporations around the world suddenly change their ways and invent new ways of growing the economy?

This doesn’t mean that I suddenly expect the market to crash and come down to earth, but I certainly expect anemic returns in the future. In Europe and Japan, we have already been seeing flat to down markets, and even in America, the stock market has been largely flat between January 2018 and now.

Dividend growth is also likely to be anemic moving forward. The chart below shows the total corporate dividends in a given year in American stocks, and while the line has been growing year over year, you can see that the growth has been flattening. In 2011 and 2012, the average dividend growth was 22% and this rate dropped to 7% between 2013 and 2016. Since 2016, the average annual dividend growth rate is 2.15%. Where will future dividend growth come from when companies have 60-70% payout ratios as it is?


All signs show that economic growth and stock market returns will be anemic if not negative in the next 10 years unless Africa can pull a miracle similar to what China and India did since 1980s. The global population growth is shrinking, inflation is non-existent, companies are putting their money to buybacks instead of growth, people are aging, companies and governments around the world are loaded with debt, urbanization is mostly done in most parts of the world, central banks are running out of bullets, not to mention the fact that stocks are valued at an average P/E of 22 as if we are enjoying a global economic boom.

Something has to give sooner or later. Investors would be better served by allocating their portfolios to defensive positions with having cash reserves on the sidelines in case better opportunities arise in the future.

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11 Comments on "Welcome To The Decade Of Slow Economic Growth"

  1. Jojo on Mon, 10th Jun 2019 12:48 am 

    Oh my! even more pretty graphs.

  2. Shortend on Mon, 10th Jun 2019 3:03 am 

    Oh my, without QE, ZIRP, Deficit Records, and a host of other financial tricks, the last decade was in a recession…perhaps it’s time for Act II to keep the show on the road.
    It gives me a warm fuzzy feeling to see all those real gains on my monthly statement.
    I do believe it’s actually real….it’s posted on my computer screen….sarcasm

  3. Hello on Mon, 10th Jun 2019 6:27 am 

    >>>> Africa can pull a miracle

    Hahaha. Good one.

  4. Outcast_Searcher on Mon, 10th Jun 2019 10:17 am 

    If such opinions were worth the electronic ink they’re written with, the authors would simply back their opinions with prescient investments and make a fortune — or at least a good living.

    Instead they’re collecting virtual dimes off the sidewalk via “likes” on investment article sites, to pay the rent.

    Funny how that works.

    Collectively, it’s a dart board, and has been for many decades.

    Why should people believe such articles or spend their money buying such investment advice again? Oh, because it reinforces what certain folks want to hear. Got it.

  5. Outcast_Searcher on Mon, 10th Jun 2019 10:22 am 

    Shortend: When you can’t spend it, be sure and get back to us. When you can’t sell some of it and diversify into other things like dollars, gold, food, and guns, be sure and get back to us.

    More importantly, when the projections of doomers are worth something aside from MAJOR losses over time, for those foolish enough to believe their claims, despite their horrendous long track record — then be SURE and tell us, because that would be a MAJOR change in the financial news re the perma-doomer class.

    In the real world, real people like those holding pensions and 401-K’s, etc. have to put up with market volatility, to earn their very decent long term return compared to inflation. Boo hoo. That’s what they’re being paid for. Ignoring the doomers is simply part of the “cost”.

  6. Shortend on Mon, 10th Jun 2019 2:56 pm 

    0utcast…yeah, it’s out there all right and there is plenty of it for the top 1% where they have so much of it they don’t know how to spend! Imaginary wealth is a great problem to have, ain’t it brother.
    Think I’ll buy a stainless steel rabbit sculpture for 90 mil?ion clams.
    Now, that’s putting it to good use!
    Too Much Money -And Too Few Places To Invest It- (Axios)

    A truly bizarre trend is having an impact on the economy — wealthy people and corporations have so much money they literally don’t know what to do with it. Why it matters: At a time when growing income inequality is fueling voter discontent and underpinning an array of social movements, the top 1% of earners and big companies are holding record levels of unused cash. The big picture: U.S. companies raked in a record $2.3 trillion in corporate profits last year, while the country’s total wealth increased by $6 trillion to $98.2 trillion (40% of which went to those with wealth over $100,000). So, where is all the money going.

    Bye, bye Sonnie boy, what can go wrong?

  7. Robert Inget on Tue, 11th Jun 2019 9:04 am

    Anjli Raval and Leslie Hook in London 33

    Extreme weather drove the growth in energy demand last year to its highest level since 2010, triggering warnings of a “vicious cycle” fuelled by reliance on heating and cooling systems that could worsen the world’s carbon emissions crisis.

    Energy group BP said in its closely watched annual market review that energy consumption grew 2.9 per cent in 2018, led by China and the US, despite modest economic growth and strengthening oil and gas prices.

    The rise spurred a 2 per cent increase in carbon emissions, the fastest since 2011 and equivalent to increasing the global passenger car fleet by a third, or just under 400m.

    “If there is a link between the growing levels of carbon in the atmosphere and the types of weather patterns observed in 2018, this would raise the possibility of a worrying vicious cycle,” Spencer Dale, BP’s chief economist, is expected to say in a speech to launch the report on Tuesday afternoon.

    The US saw an unusually high number of very hot or cold days last year, the most since the 1950s. China and Russia also saw greater fluctuations in temperature in 2018.

    Such patterns could cause stronger growth in energy demand and carbon emissions as households and businesses seek to offset the effects, Mr Dale will warn.

    Carbon dioxide in the atmosphere causes a greenhouse effect, trapping heat and increasing average global temperatures. Changes in atmospheric currents linked to climate change are also thought to contribute to extreme cold weather snaps in some areas.

    Power generation is the largest source of energy-related carbon emissions, and as the world electrifies and demand for services such as air conditioning grows, the need to clean up the system will intensify.

    “It hasn’t been possible to decarbonise the power sector quickly enough to offset the growth in demand,” Mr Dale, who was former chief economist at the Bank of England, will say.

    Climate activists and investors have called on oil and gas companies to take responsibility for their role in global warming, urging them to move into lower carbon businesses.

  8. Davy on Thu, 13th Jun 2019 5:06 am 

    “WTO Warns Global Trade May Plunge 17% In Full Trade War” zero hedge

    “In the event of a full-blown trade war, global trade would collapse by 17%, a move that would rival the Dot Com bust, warned the World Trade Organization (WTO).”

    “The increased trade tensions have forced the International Monetary Fund (IMF) to slash its global growth forecast from 3.7% to 3.5%. “If the two sides carry through with their threats to wipe out all bilateral trade via prohibitive tariffs, this could have the impact of knocking off even more,” he added. Rockwell said global imports of capital goods dropped 3% in 1Q19, the lowest level seen in over three years and a warning that the global economy is cycling down through summer. “We see uncertainty rampant, we see manufacturing output stalling, and export orders are down. All of this bodes ill for economic growth,” he said.”

    “The best way to visualize just how dangerous the trade war threat is to the global flow of trade, and the world economy in general, below is a chart on the year-over-year changes in global trade as measured by the IMF’s Direction of Trade Statistics, courtesy of BMO’s Ian Lyngern. It shows the absolutely collapse in global exports as broken down into three categories: Exports to the world (weakest since 2009), Exports to advances economies (also lowest since 2009), and Exports to the European Union (challenging 2009 lows). Even if the trade war is deescalated, the damage to the global economy is irreversible. The world is likely teetering on the edge of a trade recession, making the likelihood of global trade collapsing by 17% extraordinary high.”

  9. Davy on Thu, 13th Jun 2019 5:08 am 

    The current decline in global growth which appears to be as bad as what happened around the great financial crisis could be looked on as a good development from the point of view of ecological green efforts. It is clear to anyone who follows the science that degrowth is needed. Our collective ecological footprint needs to shrink. That said how this happens and the behavior within the decline does matter. Some positive outcomes might be a more sustainable and resilient regional multipolar economic arrangement. The great economic powers of China, Europe, and the US will regionalize reducing the excesses of globalism. The average global exponential growth that has been the case in recent history might noticeably begin to decline.

    It is degree and duration that dictate survivability. We can apply this to the economic sphere as well as to ecosystems and species. If this degrowth into a multipolar regionalism can be a modest growth decline we may see positive results. Make no mistake positive does not mean without pain. We are currently adding 80-90MIL people a year. Planetary systems and the web of life are being degraded at an alarming rate. The social fabric is fraying from general poor behavior at all levels. So what we are talking about is a slower decline with relatively less pain. This is not a new golden age it is one of less affluence and harder living.

    Some issues for those who follow the science and economics of our human predicament are renewables and debt. These are important consideration because renewables are absolutely essential for a powerdown of industrial civilization. Greens who are excessively technoptimist are fake and delusional. Tech alone is not green. Behavior must be part of this tech with demand management and conservation. The status quo is not green so adapting tech to status quo is more of the same. That said behavior will need tech to manage a decline. Renewables are part of this managed decline. This decline might not be sustainable longer term but it may be the gateway to another life. Optimistically this may be a lengthening of the decline and fall of modern man. Renewables will help us figure out this gateway. It is clear industrial agriculture and fossil fuels will have to be a part of this. How much depends on behavior not tech. The tech is there the behavior is not. There is a time value to life. A terminal condition that is acknowledged in stages with acceptance has value over a cascade of declining physical and mental health. One is meaning based the other panic. This can be applied to our civilization. Will renewables survive degrowth? We surely will not see the same investment if globalism economically bifurcates into a multipolar regionalism. How much is still a question.

    The other issue is debt and the financial system underpinning the global economy. Can this multipolar regionalism successfully decouple from the Dollar. It is really the US dollar and the Eurodollar because much of the global financial flows involve the dollar outside of the US. Can the mountains of debt that has been built up since the great financial crisis be rationalized and still allow a functioning economy? Let’s be clear with so many people and so much consumption economic velocities cannot fall below a certain level without catastrophic effects. Energy, food, and daily activity must be maintained. We are now in a new normal of central bank economic management. This is now influenced by tech and has the potential to take us further into a new financial age. It is not clear if this new age is a dark age of inhuman control or one where the excesses of market based capitalism are tempered. Likely it will be both because behavior is dangerously turbulent. Behavior is again the issue here. For this new financial age to work it will require behavioral changes. How dehumanizing this becomes is an open question.

    Currently behavior in the realm of the global community is deteriorating with a cold war between the US and China and Russia. The EU nations are caught in between and the rest of the world tailing along. This is probably the most dangerous issue ahead. We may be able to negotiate an economic degrowth into a multipolar regionalism without war. If a hot war would occur but contained it might be possible the resulting crisis could be a catalyst of change but more likely it would be a cascading failure of our modern life support. We then must hope for transition in behavior at the very top.

  10. Davy on Thu, 13th Jun 2019 5:09 am 

    Considering all this I am proposing to individuals and their locals to practice REAL Green Deep adaptation. Confront these issues individually and locally. These greater global trends are very much self-organizing with a few very powerful people and groups jockeying for power. This is both proactive and reactive with rational and irrational. This process at the top where the global power resides is not constructive change. Currently this is destructive change that individuals and locals should adapt to if they desire meaning and less pain. This destructive change can be adapted to but behavior must be changed with new lifestyles and attitudes. What is required of REAL Green Deep Adaptation is the acknowledgement and adaptation to the fact that planetary systems and the web of life are likely already bumped into phase change beyond human change. This will very likely bring an end to the stable planetary world civilization grew up with. This then is the greater challenge above the destructive decline of human civilization that REAL Green individuals and locals must adapt to. This is about what most certainly is an end game both planetary in regards to stability and human in regards to modern civilization. This may play out over decades or it may quickly unravel. This timeline is likely in our collective hands. REAL Green says adapt and beat the rush and hopefully examples of proper GREEN ways of living will bubble up through grass roots behavior.

  11. Duncan Idaho on Fri, 14th Jun 2019 10:07 pm 

    “Three-fourths of philosophy & literature is the talk of people trying to convince themselves that they really like the cage they were tricked into entering.”

    — Gary Snyder,

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