A defining feature of the economic cycle we are now going through is the constrained and fragile nature of economic growth globally. After an initial bounce post the GFC to 5.4% in 2010, global economic growth has consistently disappointed. This can be seen in the progression of the IMF’s economic growth forecasts for each year since 2012. Typically the IMF has started off looking for global growth close to 4% for the year ahead but each year has had to revise it down to around 3%, pushing the 4% bounce off into the next year. This year has been no exception – see the line for 2015 in the next chart.

Source: IMF, AMP Capital

Consequently, global growth has been continuously disappointing. It’s been the same pattern in Australia, although much of the growth slowdown in Australia owes to the ending of the mining investment boom, with a pick-up in growth back to more normal levels being constantly pushed into the future. This in turn and the fragile nature of growth has seen investors regularly questioning the post-GFC rally in shares. This note looks at why growth is so constrained and what it means.

What’s driving slow growth?

Slow and uneven growth reflects a whole range of factors.

Source: IMF, AMP Capital

Source: IMF, AMP Capital

There are some qualifications suggesting that the problem may not be quite as severe as it looks. In particular, rapid technological innovation may be leading to growth being understated. For example, the increasing number of “free” or low cost apps on smart devices providing services that were previously non-existent or very expensive is arguably delivering a benefit to consumers that is not properly measured resulting in the under statement of GDP growth and productivity and overstatement of inflation. It would suggest that people are doing a lot better than low wages growth suggests. This is an issue for another day but it is unlikely to be enough to fully offset the list of growth drags above.

Some of these drags should be temporary or cyclical but many are structural – slowing labour force growth, slowing productivity growth, slower growth in debt and problems in the emerging world. It’s hard to see these ending anytime soon.

The economic and financial impact of low growth

Fragile and constrained growth is having a number of impacts that are likely to persist. In particular these include:

Source: Thomson Reuters, AMP Capital

Implications for investors

The implications for investors are simple:

About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.