The world (ACWI) (VTI) economy is currently stuck in a low-growth environment. Bill Gross believes we’re stuck in a 2% real GDP world, regardless of Trump’s policies. Gross believes that the world may soon start accepting this ‘new normal’.
An IMF report, as highlighted by Gross in his investment outlook for April noted, “The current trend is an offspring of the financial crisis.” The report highlighted three main reasons for the low-growth ‘new normal’ growth trend that the economy is stuck in:
Slowing business investment/trade
Business investment in the US (SPY) (IWM) (QQQ) has slowed. And since the US is a major trading partner to most economies, globally, the impact can be seen beyond the US. From about $570 billion in January 2015, net domestic business investment in the US was down to about $430 billion as of October 2016 (see chart above). This is despite the fact that interest rates being largely zero-bound in the economy over the past 8 years. For real growth to pick up in the economy, businesses need to start investing more.
An ongoing level of low to negative interest rates
Every time the US Federal Reserve chose to maintain interest rates at their zero-bound level, it sent a signal to the markets that the monetary authorities are not yet confident about the state of the US economy. So, an ongoing level of low to negative interest rates has, in effect, suppressed investment confidence.
The above two listed reasons have together resulted in the misallocation of capital to low-risk projects (under a risk-off situation) coupled with a slowdown in small business creation (also reflective of the lack of aggregate business investment).
An often ignored yet important characteristic affecting world economic growth is demographics. Currently, most part of the developed world sports aging demographics. This affects growth, as older consumers consume less of almost everything except health care. Less consumption implies less spending, which is detrimental to growth.