The ability to create wealth and generate income has been questioned at a global level ever since the realisation dawned on financial markets that this recovery was not developing in the “traditional” way that history would suggest we should expect. The ability of businesses to grow has been stilted, and in many parts of the developed world, employment levels have failed to recover after the job destruction caused by the Global Financial Crisis.
Here in Australia, Chinese infrastructure spending rescued our economy from the worst of the GFC. However, as Chinese growth in this area is gradually replaced by more domestic spending on goods and services from a huge population enjoying the fruits of growing wages and spare income, the benefits of that rescue recede.
Australian mining and energy companies grew their list of assets and increased the scope for growing their operations in the expectation that Chinese raw material and energy needs would continue in a high growth trajectory. China has since moved to a “slow” rate of growth for their economy (“slow” in that it is still double most developed nations’ rates) and prices are falling for the bulk of raw materials and energy – and falling at a precipitous rate.
If economic growth cannot be lifted, and unemployment remains relatively high then does this mean that expectations for future growth and income should be reduced even further than they already have been? The phrase that is used is “stagnation”. It may be an entrenched market cycle where growth is anemic and interest rates remain very low. It could be a form of stagnation that includes higher inflation. This is termed “stagflation” and has the capacity to destroy financial positions for individuals and institutions. Nobody can forsee the future, so such pontifications can be seen as alarmist or unnecessary. Yet these stagnation outcomes fall within the range of possibilities that everyone must face when thinking about their financial future.
Here is a Financial Times video that tackles this issue. I quite like the interpretations presented as i believe they truly reflect real-world situations at the moment. Better still, the guest presenter actually puts forward a short-list of areas that government policy could be used to help boost economies and lift employment and avoid the perils of economies going nowhere or even worse – going backwards.