Secular stagnation, or the optimistic view?


A view from Seneca Investment Managers:

–         the two major causes of lower growth in developed economies in recent years are the internet and emerging markets;

–         innovation will help redeploy displaced workers;

–         emerging countries will at some point want to start spending their bloated foreign exchange reserves, a boost to the developed world;

–         we may see the gradual shift in wealth from workers to the owners of capital start to reverse.

–         Better economic growth and falling inequality will bring higher inflation, playing havoc with asset prices, particularly bonds

Peter Elston, CIO, Seneca Investment Managers, told GBI Magazine:

 “Since the financial crisis, there’s been much talk about ‘secular stagnation’, when economies suffering from a chronic shortage of demand can’t grow. On the other hand, there’s the optimistic view that the human race will always find ways to do things more efficiently, driving economic growth. Any economic weakness beyond the recession itself would therefore be temporary. I’m in the optimists’ corner.

“There are I think two major causes of lower growth in developed economies in recent years: the internet and emerging markets.

“The internet has caused rapid job destruction both obvious – online retailers replacing high street retailers – and less obvious – we no longer rely on intermediaries such as travel agents or bank tellers.

“Those displaced have often taken low productivity jobs, which has meant lower growth. It will take time for societies to work out how to redeploy them in more productive work but nevertheless, everywhere you look you see innovation – in computing, medicine, energy, transportation, construction.

“As for emerging markets, the unleashing of workforces in countries like China and India onto the world stage has been hugely deflationary for the developed world. Jobs in the emerging world have replaced jobs in the West, but the emerging world has not reciprocated with demand for Western goods and services.

“This has resulted in large trade surpluses for many emerging countries, as Trump has recently pointed out. He needn’t worry. Emerging countries will at some point want to start spending their bloated foreign exchange reserves, providing a boost to the developed world.

“Politics will likely accelerate these trends. Those left jobless or in low productive work are fighting back by voting for non-mainstream politicians who promise change.

“The last few decades have seen a gradual shift in income and wealth from workers to the owners of capital. We may well be starting to see a shift the other way.

“Higher growth in combination with this shift from labour to capital will mean structurally higher inflation in the developed world for the next few decades. Higher growth generally means higher inflation, but falling inequality also tends to be inflationary. In the US, inflation rose from 1930 to 1980 as inequality fell. It then fell throughout the last four decades as inequality rose.

“Better economic growth and falling inequality will be a blessing for many, but the associated higher inflation could play havoc with financial asset prices, particularly bonds. From 1940 to 1981, long bonds in the US returned -67% in real terms, or -2.7% per annum compared with +2.1% on average over the last 150 years (to November 2017).

“Are we right to expect higher inflation in the decades ahead? The term ‘secular stagnation’ was coined by American economist Alvin Hansen in 1938 following two deep recessions in just a few years. His view was that the severity of these downturns was evidence America could no longer grow. Had he known the invention of the silicon chip lay just around the corner, he  might have decided not to publish.”

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