•  Only the financial sector has undergone substantial deleveraging to-date. Essentially, the process of deleveraging remains incomplete. The world as a whole has lived beyond its means. It must now work off these past excesses. The gradual unwinding of the debt build-up in both the private and public sectors will have a dampening effect on economic growth in the advanced economies for several years. The second driver of growth is demographics. Slowing population growth and rapid ageing are the most daunting headwinds buffeting the global economy over the next 10–20 years. In fact, demographic trends will negatively impact virtually all of the world’s major economies, both advanced and emerging. •  In the US, UK, and France, annualised labour force growth will be barely positive over the next two decades. •  In Japan and Germany, the labour force is expected to shrink, subtracting from GDP growth. •  The most dramatic decline will be in China. Labour force contribution to GDP growth will swing from a positive 1.5 percentage points over the last 20 years to virtually zero over the next 20 years, with much of the decline occurring in the immediate future. But demographic decline is not universal. Many emerging market economies – India and South-east Asia, for example – will continue to have favourable demographics that will support growth. Demographics is not destiny. This brings us to the third driver of growth – productivity. Human ingenuity to coax higher production out of scarce resources has overcome past demographic challenges.
Despite ultraaccommodative monetary policy, most advanced economies have not attained so-called escape velocity. •  The legacies of the financial crisis – in the form of debt overhangs – continue to exert a drag. •  The structural deficiencies in the major economies, such as under-investment, cast a dark cloud on future potential growth. But one thing that ultra-low interest rates over the past six years have clearly done is to depress returns, particularly in fixed income assets. •  US bond returns since 2009 has averaged 2.3% p.a. compared to returns of 5.8% p.a. over the past 20 years. This has contributed to a more challenging investing environment for government funds – namely pension funds, sovereign wealth funds, and central banks – many of which have significant allocations to developed market fixed income instruments. Mean reversion is a key tenet of investment theory – the expectation is that as interest rates normalise, returns should revert to pre-crisis levels. But the cliché that this time is different could well be true. Secular trends weigh on future economic growth, and consequently the real return on investment. Drivers of future economic growth What are the prospects for future economic growth? There are, in my view, four key drivers of long-term growth: deleveraging, demographics, productivity, and energy. Let me elaborate on each of them. First, deleveraging. Global balance sheets need to undergo significant adjustments. This is a structural issue that will take time to address.