A CHASTENING OUTLOOK FOR THE GLOBAL ECONOMY
It is customary to use the start of the year to set out some forecasts. Though I’ve not previously done this, I’ve decided to make an exception this time – mainly because I’m convinced that the wrong things are being forecast.
Central forecasts tend to focus on real GDP, but in so doing they miss at least three critical parameters.
The first is the relationship between growth and borrowing.
The second is the absolute scale of debt, and our ability to manage it.
The third is the impact of a tightening resource set on the real value of global economic output.
Most commentators produce projections for growth in GDP, and mine are for global real growth of around 2.3% between 2017 and 2020. I expect growth to slow, but to remain positive, in countries such as the United States, Britain and China.
It’s worth noting, in passing, that these growth numbers do not do much to boost the prosperity of the individual, since they correspond to very modest per capita improvements once population growth is taken into account. Moreover, the cost of household essentials is likely to grow more rapidly than general inflation through the forecast period.
What is more intriguing than straightforward growth projections, and surely more important too, is the trajectory of indebtedness accompanying these growth estimates. Between 2000 and 2015, and expressed at constant 2015 dollar values, global real GDP expanded by $27 trillion – but this came at the expense of $87 trillion in additional indebtedness (a number which excludes the inter-bank or “financial” sector). This meant that, in inflation-adjusted terms, each growth dollar cost $3.25 in net new debt.
If anything, this borrowing-to-growth number may worsen as we look forward, my projection being that the world will add almost $3.60 of new debt for each $1 of reported real growth between now and 2020. On this basis, the world should be taking on about $5.8 trillion of net new debt annually, but preliminary indications are that net borrowing substantially exceeded this number in 2016. China has clearly caught the borrowing bug, whilst big business continues to take on cheap debt and use it to buy back stock. Incredible though it may seem, the shock of 2008-09 appears already to be receding from the collective memory, rebuilding pre-2008 attitudes to debt.
On my forecast basis, global real “growth” of $8.2 trillion between now and 2020 is likely to come at a cost of $29 trillion in new debt. If correct, this would lift the global debt-to-GDP ratio to 235% in 2020, compared with 221% in 2015 and 155% in 2000.
Adding everything together, the world would be $116 trillion more indebted in 2020 than in 2000, whilst real GDP would have increased by $35 trillion.
Obviously, this is not a sustainable way to behave. Taking individual economies as examples, the United States would have added $30 trillion in debt for $6 trillion in growth. Britain would have grown by £620bn but borrowed £3,340bn in the process. China’s debt would have increased by $32 trillion for a $12 trillion gain in real GDP.
Moreover, these numbers relate only to formal debt, excluding the financial sector whilst taking no account of quasi-debt obligations such as pension commitments. These are likely to become ever more onerous, particularly in those Western economies in which the population is ageing.
Pretty obviously, we are deluding ourselves where growth is concerned, spending borrowed money and calling this “growth”. Someone does not become more prosperous by increasing his or her overdraft and then spending it – he or she merely looks more prosperous to those who gauge prosperity by looking only at a lifestyle impression conveyed by consumption.
Meanwhile., the global resource set continues to tighten against us, adding to the “economic rent” which we experience, but fail to measure. According to the SEEDS system, the trend energy cost of energy (ECoE) cost us 4% of GDP back in 2000, but now accounts for 8.2%, and will reach 9.6% by 2020. Adjusting real GDP for this indicates that, between 2000 and 2015, the amount of debt added for each “growth” dollar was $3.80, not $3.25 – and that, from here on, each $1 of growth is going to cost us over $4.70 in new borrowing.
Altogether, what we are witnessing is a Ponzi-style financial economy heading for end-game, for four main reasons.
First, we have made growth dependent on borrowing, which was never a sustainable model.
Second, the ratio of efficiency with which we turn borrowing into growth is getting steadily worse.
Third, the demands being made on us by the deterioration of the resource scarcity equation are worsening.
Fourth, the ageing of the population is adding further strains to a system that is already nearing over-stretch.
One thing seems certain – we cannot, for much longer, carry on as we are.