Maybe This Global Slowdown Is Different
The global economy is slowing down. A couple of the big emerging-market economies that drove much of the growth during the past 15 years have hit a wall, and the question of the moment is whether the biggest of them, China, is in real trouble too. Commodity prices are tanking. Trade volumes are down. The Baltic Dry Index of shipping costs, which rebounded from a record low earlier this year, is falling again.
These are all characteristic of a cyclical downturn. And this is a cyclical downturn -- oil prices will rise again someday. So will emerging-market stock and bond prices.
But there could also be something else afoot. We could be seeing early signs of longer-term changes in the global economy -- changes that could be enormously positive, but also have the potential to upend a lot about how the world works today.
At this point these are just inklings, but I did what I always do when I have an inkling: I made some charts. First, here's the picture on global trade:
After a spectacular rise in the 2000s, trade volumes plummeted after the 2008 financial crisis. They then recovered, but declined again in 2013. More up-to-date figures for just the G7 and BRIICS countries show that the decline may be accelerating.
Again, these things do go in waves. But there's good reason to think that the trade gains of the 1990s and 2000s probably won't be replicated anytime soon. As Michael Francis and Louis Morel of the Bank of Canada summed up in a recent report:
[T]rade reforms and technological innovations that lowered trade costs during the 1990s had a substantial effect on global trade by encouraging emerging markets to integrate into the global economy and by making global value chains economically viable. As a result, global trade rose relative to GDP. However, since this process is largely complete, the underlying incentives to expand trade are likely weaker now than they were in previous decades, leaving the world in a state where trade is neither rising nor falling relative to GDP.
A related argument is the one that's been made by Harold Sirkin of the Boston Consulting Group for several years: Building global supply chains became so fashionable for Western manufacturers that they built them even when it made sense to keep production closer to customers; now they're retrenching and revising their approach.
Still, I can't help but thinking (perhaps wishfully thinking) that what we're seeing might also be the beginnings of a plateauing in the world's demand for things -- and, even more, the resources needed to make those things. After all, the latest United Nations population projections, released in July, do indicate that we may be nearing a plateauing of the number of people on the planet.
Still, in the median forecast, the plateauing won't happen till the end of the century. It's possible that it won't happen at all. Also, there are still billions of people around the world hoping to emerge from poverty and consume more things and resources. We'd have to see already-affluent people buying fewer things and consuming fewer resources to get the kind of shift I'm talking about. Are we seeing that?
Well, sort of. Here's one remarkable shift the U.S. economy has made during the past 65 years:
The U.S. economy has grown so much during that period that people now are still buying more physical stuff than they did in 1950. Still, there are signs of a plateau. Consider what was long the iconic good produced by the U.S. economy, the automobile.
The big growth years definitely seem to be over, even though U.S. population has kept growing. Still, this chart doesn't exactly offer conclusive evidence. The trajectory on energy use is a little clearer.
Americans use substantially less energy per capita now than they did in the 1990s. In Europe the trajectory is muddled by the entry of Eastern European countries into the global economy in the 1990s, which brought increased affluence and with it higher energy use -- but the low level is an indication that the U.S. likely still has a lot of room to cut. The rapid growth in energy use in China was of course one of the factors behind the global natural resources boom that recently went bust.
The decline in Chinese demand for natural resources during the past year has been one of the main things prompting observers to wonder if the country is undergoing a much-sharper economic slowdown than the official numbers indicate. It may well be. But this also could be evidence of the Chinese economy's shift away from resource-intensive manufacturing and infrastructure-building and toward providing services for Chinese consumers. In general, developing countries are making the switch from goods to services much earlier in their development than the U.S. and Europe did. This may not be all good news; economist Dani Rodrik worries that it might make it harder for them to catch up with wealthy countries. But it does mean less demand for things, and for the resources to make those things.
Finally, consider the things that people do want to spend their money on. The defining consumer product of our age is the smartphone. A smartphone is a good, and it takes resources to make and transport it. Still, it takes a lot less resources than, say, a car. Most of its value is in the software that is loaded onto it and the people, information and entertainment you can connect to with it. That's a different sort of value creation than 20th-century resource-based value creation. If that's the direction the global economy is headed in, the connections between growth, trade and resource consumption aren't going to be the same as they have been. That is probably a good thing.
G7: Canada, France, Germany, Italy, Japan, United Kingdom, United States. BRIICS: Brazil, the Russian Federation, India, Indonesia, China, South Africa.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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