GMO's Jeremy Grantham's Q3 2012 Letter: On the Road to Zero Growth « Market Montage

For the Jeremy Grantham fans out there, this quarter's letter is an especially dour look on the long term prospects of the country.  He argues the 3%+ type of GDP growth of a relatively young America in a less globalized world is forever gone, and we should expect a new normal – like 1.4% normal (or as he calls it 'adjusted 0.9%), in the decades ahead….which will then drop even further (to adjusted 0.4%).  Positively Japan-like.  I think it's a *bit* dour even though I've said globalization is going to be a net negative for the middle class of developed worlds far before it was popular.  I do expect technology to take care of a lot of the "resource" issues in the decades ahead – compared to Japan the U.S. has a wealth of resources which has created a lack of urgency on this front, for better or worse.   However in other areas technology is a double edged sword – so many jobs are being extinguished by it, heck I was reading the other day about a company developing a 'hamburger flipper' robot, so imagine the day many of those jobs go away.  Extrapolate from there!

Grantham's main reasons as follows:

  • Population growth that peaked at 1.5% in the 1970s will fall to less than half a percent.  Man-hours worked will grow at around 0.2% per year.
  • Productivity in manufacturing has been high and is expected to stay high, but manufacturing is now only 9% of the U.S. economy, down from 24% in 1900 and 15% in 1990. It is on its way to only 5% by 2040 or so. There is a limit as to how much this small segment can add to total productivity.
  • Growth in service productivity in contrast is low and declining. Total productivity is calculated to be just 1.3% through 2030, if we use current accounting methods.
  • Resource costs have been rising, conservatively, at 7% a year since 2000. If this is maintained in a world growing at under 4% and a developed world at under 1.5% it is easy to see how the squeeze will intensify.
  • Increasing climate damage, reflected mainly in food prices and flood damage, is going to increase. With any luck this will not be severe before 2030 (we allow for a 0.1% setback) but it is very likely to accelerate between 2030 and 2050. A great deal will depend on our responses.
Full read below:

Grantham road to zero growth

Disclosure Notice

Any securities mentioned on this page are not held by the author in his personal portfolio.