Deloitte Monday Briefing: Don’t Bet Against The Growth Escalator

The Monday Briefing, written by Ian Stewart, Deloitte's Chief Economist in the UK, gives a personal view on topical financial and economic issues.

The Global Financial Crisis has contributed to a mood of pessimism about the ability of industrialised economies to deliver rising living standards. Parents worry about the lack of opportunities for their children and the risk that they face static or declining standards of living. Such concerns have clearly been shaped by the major squeeze on households of the last five years. But are such conditions really likely to persist for many years to come? Certainly history suggests that deep financial crises cast a long shadow, depressing growth for a number of years. Yet, in time, economies bounce back, sometimes with renewed vigour. The US economy contracted by a massive 27% in the Great Depression. By 1938, five years after the trough of the Depression, the level of US GDP was only marginally higher than it had been ten years earlier. In the next ten years, to 1948, US GDP doubled; it doubled again over the following 20 years. Today the US economy is thirteen times as large as it was in 1938. Warren Buffett famously takes a long view of investing. His strategy is based on the view that, in the long term, the US economy will keep growing. Earlier this year he wrote, "investors and managers are in a game that is heavily stacked in their favour...I believe it is a terrible mistake to try to dance in and out of it based upon...the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it". The data support this view. From 1986 to 2011 real US GDP rose 94%. Incomes rose far more slowly and the gains of growth were heavily skewed towards higher earners. Nonetheless, median real income in the US rose 21% over this period. Over the same period UK GDP rose 91% and median real incomes rose 62%. Looking across the world's top 29 industrialised nations, the OECD found that real incomes rose an average of 1.7% a year from the mid-1980s to the late 2000s. At this rate of growth living standards double every 40 years. Of course, the benefits of GDP growth in the West have not been evenly distributed in the last few decades, with much of the improvement going to high earners and to profits. As a result, income inequality has risen. Yet even for those in the bottom 10% of the income distribution in the industrialised world, incomes have risen by an average of...