Global GDP sees record fall in 2015 as world hits “demographic cliff”

Economic growth

SHARE THIS STORY

New Old 1950- Oct15aCentral bankers remain in Denial about the failure of their stimulus policies.  Yet new IMF data for global GDP shows GDP fell by $3.8tn in 2015 – the biggest fall on record – as the world hits the “demographic cliff”.  We have now seen 2 record falls in 6 years, as the previous record was $3.3tn in 2009.

This confirms that the fault lines are now opening in the ‘Ring of Fire’, as discussed on Monday.  As  William White has warned:

“The global financial system has become dangerously unstable and faces an avalanche of bankruptcies that will test social and political stability.  The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up.”

Sadly, today’s central bankers are just as blind to his warnings as they were in 2007-8.  Thus European Central Bank head Mario Draghi set off another mini-rally in shares and oil markets on Thursday, promising he would print more money to boost financial markets.  He made the same promise last month, also causing markets to rally sharply.

Yet common sense tells us that you cannot have the same levels of growth today as in the past.  As the chart shows, the world has now reached the “demographic cliff“.  We now have 1bn people moving into the low-spending, low-earning New Old 55+ generation for the first time in history.  They will be more than 1 in 5 of the population by 2030, twice the percentage in 1950.

So as White warns, the next recession will reveal that many of today’s debts will never be repaid:

  • White mentions a major Chinese devaluation as one potential cause of recession
  • The European refugee crisis is anther potential flashpoint, with the President of the European Commission continually warning that “a single currency does not exist if the Schengen (open European border Treaty) fails“. This problem is increasingly urgent, as more and more countries re-introduce border controls, and public opinion polarises after the Paris and Cologne attacks
  • Then there are potential flashpoints in the Middle East and, of course, in Eastern Europe
  • Plus, there is the vast debt associated with US financial markets, which complacently believe the central banks will never let prices fall

I am sure White is right again this time.  It is very hard to see how this debt can possibly be repaid, as the global economy continues to slow under the influence of its rapidly ageing population.  Historically, as he says, debt Jubilees used to occur every 50 years, going back to Sumerian times, and were when all debts were forgiven.

This will have to happen again in our society.  McKinsey’s report last year highlighted the vast debt that has been built up since 2007 – which is now 3x world GDP.  A simple calculation reveals the scale of the problem:

  • McKinsey estimated world debt increased by $57tn between 2007 – 2014
  • Global GDP grew by $19.8tn from $57.5tn to $77.3tn over the same period (IMF data)
  • It therefore took $2.9tn of debt to add $1tn of GDP growth
  • To put it another way round, $1 of debt gave only 35 cents of GDP growth
  • In the 2000-7 period, each $1 of debt gave 44 cents of growth – so the trend is clearly getting worse

And yet, of course, central bankers still insist that adding more debt is the way to solve today’s crisis.  They seem to be in total Denial about the fact that if $1 of lending creates only 35 cents of growth, you are effectively wasting the other 65 cents.  I therefore fear that White’s warning supports the forecast in my 2016-18 Budget Outlook:

“2016 will see China putting its foot hard on the brakes of the Old Normal economy – whilst Western policymakers compete to ramp up stimulus to compensate.  It could easily prove to be as difficult a year as 2008.  Companies owe it to themselves to plan ahead for this Scenario.  ’Flash crashes’ take place in a flash, not over months.  It could prove too late afterwards to regret that you had failed to put the necessary contingency plan in place.”

PREVIOUS POST

"World faces wave of epic debt defaults" - central bank veteran

25/01/2016

Central bankers remain in Denial about the failure of their stimulus policies. ...

Learn more
NEXT POST

Renault's success with Dacia highlights changes underway in European auto markets

29/01/2016

Central bankers remain in Denial about the failure of their stimulus policies. ...

Learn more
More posts
Ageing Perennials set to negate central bank stimulus as recession approaches
10/03/2019

The world’s best leading indicator for the global economy is still firmly signalling recession...

Read
BASF prepares its UK supply chain for Brexit
24/02/2019

BASF has been working with Ready for Brexit (the online platform I co-founded last year) as part of ...

Read
Companies and investors have just 30 working days left to prepare for a No Deal Brexit
17/02/2019

Companies across the UK and EU27 are suddenly realising there are now just 30 working days until the...

Read
The BoE’s pre-emptive strike is not without risk
12/02/2019

The Financial Times has kindly printed my letter below, arguing that it seems the default answer to ...

Read
Flexible working is key to reversing today’s collapse in fertility rates
27/01/2019

Women in most parts of the world are not having enough children to replace our population. This is o...

Read
No Deal Brexit remains UK law unless MPs reverse their previous votes
20/01/2019

“That couldn’t happen” are probably the 3 most dangerous words in the English lang...

Read
CEOs need new business models amid downturn
14/01/2019

Many indicators are now pointing towards a global downturn in the economy, along with paradigm shif...

Read
Chart of the Year – China’s shadow banking collapse means deflation may be round the corner
16/12/2018

Last year it was Bitcoin, in 2016 it was the near-doubling in US 10-year interest rates, and in 2015...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more