Six concluding thoughts

The Monday Briefing will be under new management from next Monday, with Debapratim De, known to all as Debo, the firm’s new chief economist, taking the helm. After almost 20 years at Deloitte and 18 years of writing the Monday Briefing, I am retiring. 

I have looked back at briefings over the years and am thinking about the patterns and the themes that emerge. In understanding this period, and thinking about what may lie ahead, six themes strike me as being of particular significance. 

First, low growth explains everything (almost). Most major economies are growing at far lower rates than they were 20 years ago. Slower growth is at the root of, or has contributed to, many of the West’s most intractable problems – everything from sluggish income growth to political polarisation, inadequate public services and high levels of government debt. This is a particular problem in Europe where trend growth has more than halved since 2006, but even the US and China have seen a material decline in their growth rates. The exact sources of the slowdown are hotly debated – ageing populations and, external shocks, including the pandemic, have clearly taken a toll – and are likely to differ by country. The challenge for governments is, to paraphrase Marx on philosophers, to find ways to boost growth rates. Supply-side reforms helped raise western growth rates between the 1980s and 1990s. The prescription today will be different, but the West needs to rediscover its appetite for pro-growth reforms. 

Second, GDP growth in most western economies would have been even weaker without rising levels of immigration. Immigration has bolstered growth, but it’s done less for growth in GDP per capita, which is the key driver of living standards. The effect of migration on GDP per capita depends on whether migrants work and how much they earn – skilled, high-wage migration has the most beneficial impact on GDP per capita. Strong inward migration helped boost Canadian growth in the last 15 years well above European rates. But measured in terms of growth in GDP per capita, Canada’s performance is similar to Europe’s. The benefits of strong growth in living standards have been offset by a rapidly expanding population. This can apply in reverse. Restrictive immigration policies have contributed to Japan’s extremely low growth rate in recent decades. But on GDP per capita, Japan has actually performed broadly in line with Australia, Canada and better than the UK since 2010 – a surprising finding given the gloom that so often accompanies commentary about Japan. In assessing country performance, GDP per capita warrants at least as much attention as headline GDP growth. 

Third, financial risk has migrated from the banking sector to government balance sheets. Tough regulation in the wake of the 2008 financial crisis obliged banks to build up capital and cut back on risk-taking. That has created a more secure, safer banking system and helped the West avoid a serious financial crisis. Government balance sheets have gone in the opposite direction. The financial crisis, the pandemic and the energy shock elicited a level of government activism and spending not seen outside wars. Government indebtedness, measured as a ratio of GDP, has surged, in the case of the US, Japan and France, to record levels. Debt ratios are at multi-decade highs in most other large, rich economies, other than Germany. Ultra-low interest rates softened the impact of rising levels of debt. With government bond yields back up to levels that were seen as normal 20 years ago, government debt is a bigger problem. That gives governments less room to borrow to fight crises. It also increases the risk of a financial crisis emanating from the government bond markets, much it did in the UK in October 2022, when the Liz Truss mini-budget triggered a selloff in the government bond market, forcing a U-turn on policy and precipitating Ms Truss’ resignation.  

Fourth, geopolitics is forcing a ‘re-wiring’ of the global economy. Patterns of international trade are shifting, and supply chains are becoming longer and more complex. Trade flows are increasingly concentrated along geopolitically aligned blocs. The definition of strategic sectors and products is widening, with governments intervening to protect domestic producers or secure access to overseas supplies such as rare-earth metals and semiconductors. Technology is at the frontier of international rivalries. The US and its allies have instituted export controls, outbound investment screening and restrictions on the use of dual-use technology. Meanwhile, non-western economies are promoting the use of alternatives to the US dollar in trade and investment and are seeking to protect their financial systems against western regulation and sanctions. Globalisation is being reshaped for a more fractured and contested international order. 

Fifth, three industrial upheavals – in technology, energy and defence – are running in parallel. Investment is flowing into AI and associated technologies, new energy systems and into the defence sector on a huge scale. The levels of spending are breathtaking. Capital spending on AI, data centres and technology has accounted for more than half of all US growth in the last 18 months. German defence spending is set to double in the next three years.  The International Energy Agency estimates that spending on energy infrastructure and systems is running at $3.3tn a year, more than double the rates that have prevailed over most of the last quarter of a century. The race to deploy AI, for cleaner, cheaper and more secure energy and to rebuild western defences will fundamentally shape economies for years to come.

Sixth, low growth is not inevitable. Periods of relatively low growth are nothing new. UK growth weakened markedly in the late 19th and early 20th centuries and again in the 1970s. Both were followed by a return to more rapid, sustained growth, aided by new technologies and, in the 1980s, by government reforms. The US economist, Robert Gordon, has argued that the West’s growth malaise today may be because we have run out of truly transformational new technologies. This is not a new idea. In the 1930s the US economist Alvin Hansen argued that the great growth boosting technologies of the past had run their course and that no new ones were in sight. Hansen’s comments preceded a half-century of rapid, technology-driven US growth. The growing capacity of AI suggests this could be that rare thing – a general-purpose technology, one that operates across the economy in a way that raises overall productivity. The steam engine, electrification and the computer were just such technologies. To me AI offers our best shot at technology-led productivity growth – and faster GDP growth - since the computer and communications revolution of the 1980s and 1990s.