Economic growth in the US
In his investment outlook for January 2017, Bill Gross highlights a key ingredient that would be essential to turn risk markets’ expectations into a reality; additional real growth of 1%. Over the past 10 years, the US economy (SPY) (IWM) has been growing at a 2% annual real GDP growth rate. And historically, as Gross points out, growth has been able to propel corporate profitability at 3% plus levels. Real growth rates at 2% or lower have typically oppressed corporate profits. So, boosting the economy enough to result in a 3% real GDP growth rate is a sure task in the hands of President-elect Donald Trump.
Another interesting point that Gross makes here is that the US economy is already at full capacity. So, it may be quite a challenge to stimulate an economy that is already operating at full-tilt. We could see Donald Trump’s policies affecting economic growth positively over the next 2-3 years, but for long-term sustainability of a 3% growth rate, investment spending will need to be bolstered in a big way. And funds available with businesses need to be diverted from merger & acquisition and buyback activities towards investment and capacity building measures.
Threats to productivity and growth
Gross here, does not fail to mention the “ongoing threats to productivity and therefore GDP growth.”
Demographics, according to Gross, pose a substantial hurdle to growth in all major developed markets. CIA data confirms that median age for the US economy is 37.9 years, while it is 40.5 years in the UK (EWU), 42.7 years in the European Union (FEZ), and 46.9 years in Japan (as charted above).
There’s also the risk posed by a high debt-to-GDP ratio sported by these economies; US is at 104.17, EU at 90.7, and Japan (EWJ) at 229.20. With interest rates poised to rise these debt burdens could serve as anchors to economic growth. Then there is technology playing its part in displacing human labor, thereby contributing to unemployment.
There is one other important factor that may make that extra 1% real growth hard to come by. Most of the developed world now seems to be de-globalizing; we hear Donald Trump in the US talking about building a wall, renegotiating trade deals, and adopting protectionist policies; in France, far-right presidential candidate Marine Le Pen is pro-protectionism; the UK has already decided to exit the European Union, and there’s a possibility of a contagion effect on other European nations such as Italy, France, the Netherlands, and Scotland to exit the EU. Growth could indeed become a rare commodity in a de-globalized world.