The 2010s were an odd decade for the global economy. The recovery from the so-called Great Recession has persisted but it has been sluggish. The US is enjoying its longest continuous expansion on record but while it has lasted a long time, it has been relatively shallow. The eurozone, absent a brief upturn in 2016 and 2017, has generally been in either a state of abject crisis or stagnation. Across the advanced economies, productivity growth has slowed and demographic tailwinds have gradually become headwinds. All told, their average annual growth of 3 per cent in the 1980s and 1990s compares to 2 per cent or so in the 2010s.
But despite a decade of slower growth in the core global economies—and a decade of very poor real income growth for most workers—investors have little to complain about. Global stocks, and especially US ones, have boomed and, at the same time, returns from holding bonds have exceeded almost anyone’s expectations. Losing money has been pretty hard.
The factor linking sluggish economic outcomes and a bonanza for global investors has been historically low interest rates. Global central banks rode to the rescue of the economy in 2008 and 2009 by cutting them to previously unimagined levels. Policy then became “unconventional” with the advent of quantitative easing (the electronic creation of new money by central banks to purchase assets), negative interest rates in Japan and much of Europe and all manner of schemes to boost lending and credit growth. Unconventional policy has failed to kickstart a strong recovery but it may have prevented the world experiencing another depression. The impact on asset prices, though, has been extreme.
So, what will the next decade hold for investors? An important part of that answer will be decided by the direction of rates. The US, between late 2016 and 2018, tried to lead the way in slowly “normalising” monetary policy. The Federal Reserve gradually raised rates to 2.5 per cent by early 2019, still half the level that would once have been regarded as normal but well above that seen in Europe, the UK or Japan. Over the past few months, however, it’s been forced to change tack and they are now back down at 1.5 per cent. If the US, the major economy that has experienced the strongest recovery, has been unable to normalise policy then it seems unlikely the rest of the developed world will manage it.
It’s easy to take a pessimistic view on global growth. Demographic factors (fewer workers entering the job market, an aging population and a rising support ratio of retirees to workers) look set to be a drag. A decade of disappointing productivity growth has dampened hopes of a rapid rebound.
“For all the gloom in the advanced economies, growth is still decent in many emerging markets”
But the gloom can be overdone. Productivity growth might bounce back, or at least has the potential to be a positive surprise. The world has seen rapid technological change and these things often take time to filter through into higher growth numbers. And for all the gloom in the advanced economies, growth is still decent in many emerging markets. Their share of global growth is rising and, as these economies have been growing at a faster pace, that has provided a boost to overall numbers. Indeed, despite the slowdown in the developed world, global growth was higher in the 2010s than the 1990s. The world has the growing weight of China and India to thank for that.
The world economy may have a better decade ahead than the one it just experienced. That does not mean investors will have such a good time. Periods of strong returns from assets tend to be followed by periods of weaker ones. Even if interest rates are unlikely to rise to levels once seen as normal, they are unlikely to be cut by the same magnitude again. And in the absence of ever-lower discount rates, it’s hard to see stock and bond prices continuing to rise at the same breakneck pace.
But even if returns will be less spectacular in the future, the economic fundamentals remain decent—and that should give investors some optimism, at least.