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Home > Blogs > Anthony Harrington > Squaring up to a low growth world- Part Two

Squaring up to a low growth world- Part Two

Squaring up to a low growth world- Part Two Anthony Harrington

In Part One I looked at the demographic argument put forward by Jeremy Grantham, co founder and chief investment strategist at GMO (Grantham, Mayo Van Otterloo), in the firm's November 2012 Newsletter which set out to show that trend growth in excess of 3% a year as the norm for the US economy, is bust for good. In Part Two we take up the two further strands of his argument which basically sees the US struggling to achieve 1% growth into the dim and distant future. These two strands are the additional negative impacts of steadily increasing resource costs, allied to increasing resource scarcity, and the potentially damaging effects of climate change. Both of these have the power, over the next decade or so, to have a tremendous negative impact on growth, he argues.

Up until 2002, Grantham says, the average price decline for 33 equally weighted commodities was 1.2% a year. This was driven by the fact that technological advances in resource extraction stayed ahead of the rising cost of marginal extraction (as ore seams got thinner and wells got deeper, for example). Technological gains, in other words, masked increasing scarcity and prevented it from driving up resource prices. Since 2002, however, resource prices have doubled in a decade, showing compound growth, year on year of 7%. Even agricultural resource prices are going up sharply as growers battle with increased fertilizer costs and sharply increased fuel costs.

This is great if what you want to do is to invest in commodity companies since they look to be on a roll. The rest of the economy, however, is taking  a beating. Grantham points to a chart showing the total cost of commodities as a percentage of GDP.  In the Middle Ages it was close to 100%, when the world was really in survival mode. By the early 1960s it had shrunk to about 16% of GDP and by 2000 resource costs were no more than 3% of US GDP. In the 12 years since then, however, resource costs have once again began to rise. In the 90 years prior to 2002, he argues, falling resource costs raised the growth rate of the non-resource world by around 0.2% a year as an unmeasured productivity gain. Conversely, when real resource costs rise, as they are now doing, they create productivity losses that also do not show up in the official data.

"I believe (...) that it is highly unlikely that productivity will exceed the rising costs of resources, and so the squeeze on growth will continue," he argues.

Climate change, Grantham argues, has the potential to generate more of a cost and to take a bigger bite out of GDP than all the other measures put together. His words are echoed by a 331-page report published last year (September 2012) by the DARA Group, called "Climate Vulnerability Monitor: A guide to the cold calculus of a Hot Planet." ARA argues that by 2030 the cost of climate change and air pollution combined will amount to some 3.2% of global GDP. The main brunt, however, will not be on advanced economies such as the US economy, but on the world's least developed countries, causing them to see losses of around 11% of GDP.

Grantham has an unsettling way of summarizing the statistics concerning global warming. Since 1850 our emissions of greenhouse gasses have increased global temperatures by 0.8 degrees Centigrade. Take it that we need to limit the rise in atmospheric CO2 to no more than 2.0% to avoid serious climate damage, that means limiting CO2 output to 565 gigatons. The hydrocarbon industry has proven reserves of 2,800 gigatons and in an oil hungry world that means leaving the vast bulk of those reserves untouched. What are the chances we'll do that? Or that oil companies will allow 80% of their market value to be left in the ground? Nil. Oops.

Further reading on climate change:

Tags: Climate , climate change , DARA Group , Development , global warming , Jeremy Grantham , resource scarcity , US economy , USA
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