A critical juncture

We are now confronted with an election thicket in the UK and France, and the first TV debate in an already highly unusual US Presidential election. Years of stagnating growth (both perceived and real), surging immigration and worsening public services are a challenging brew for any electorate to choke down.

In the case of the former, there is now decent evidence to show that such economic torpor can help explain the rise of anti-system parties and candidates these last few years in Europe. In 2004, hard and soft Eurosceptic parties combined managed to secure less than 5% of votes in national elections. As of today, that figure sits closer to 30%.

The longer stagnation continues, the more of us are drawn to the populist flame. The answers offered are invariably counterproductive, albeit superficially alluring. Closing borders and protecting domestic industries may sound reassuring to those battered by global competition in a more zero-sum economy. However, the results are likely even less growth and more inflation.

Some continue to argue that the environmental doomsday clock should lead us to question why we need more growth at all. The ‘de-growth’ movement has gained momentum in many corners of Europe in particular these last few years – the idea being that if we want a planet to actually live on, we need to get used to wanting a lot less.

Why growth remains the answer, no matter the question

Governments have a lot less agency in the growth story than popularly imagined. There are times during a country’s development where the state’s actions can be decisive. The Asian Tigers and latterly China are good examples.[1] There is also evidence to suggest that the state can be a positive force in certain aspects of the innovation value chain. However, luck plays a giant and mostly underacknowledged role.

Major technological breakthroughs – the keystone of productivity growth – cannot be called up at will. Again, there are ways to provide fertile ground for such breakthroughs. Individual freedoms have been important in the past, as have strong links between academia, state and the commercialisation process, to name a couple. However, serendipity often dictates the timetable.

This growth does not have to come at the expense of the environment . Infinite growth with finite resources sounds oxymoronic, but in fact is more or less possible. Growth is driven by our ideas on ever more ingenious ways to combine those finite resources – it doesn’t originate from the tangible world of objects, but the intangible one of ideas .?

For much of humankind’s 300,000 odd years on this planet, this truth remained undiscovered or at least insufficiently harnessed. The economic life of a hunter-gatherer was alarmingly similar to that of an early 19th century factory worker – ‘nasty, brutish and short.’

The trick of sustainably growing the economic pie has doubled life spans around the world, and significantly improved the content of those lives. This last period of stagnation in parts of the developed world has given us a taste of how the politics evolves in growth’s absence – growth is both desirable and consistent with a more sustainable future .

Investment conclusion

The next few weeks will no doubt contain plenty to unsettle investors, as campaign trail patter is translated straight into actioned policy by pundits. However, the latest data on the economies that matter to investors suggest the underlying state is better than we’ve seen for some time. Inflation continues to unevenly move on, while unemployment remains low. Interest rates cuts are coming over the summer, which ultimately should help bolster an already decent outlook for global growth.

Most importantly in this outlook for investors is the fact that the next industrial revolution/transformation is gaining momentum. There is no doubt that we are seeing some AI-washing, as certain businesses stretch to link themselves to the hottest ticket in town right now. However, there is also some substance here. Diversify broadly across and within asset classes and try not to look too much.

As usual we cover these themes and more in our weekly ‘Word on the Street’ podcast. Find out more, here .

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[1] Rodrik, D (Dec 1994) – Getting interventions right: How South Korea and Taiwan grew rich – NBER.