When environmentalists ring alarm bells about what we are doing to the Earth, most Americans hit the snooze button, but when one of the world's most respected financial analysts says that climate change and resource scarcity are imperiling economic growth, maybe it's time to wake up.
This past week Jeremy Grantham, the co-founder and chief investment strategist of Grantham Mayo Van Otterloo (GMO), released his latest quarterly letter. Titled "On the Road to Zero Growth," it has been labeled by business analysts as a "dose of glum" and "the most depressing forecast you will ever see."
Not known for pulling his punches, Grantham starts off his letter saying, "The U.S. GDP growth rate that we have become accustomed to for over a hundred years -- in excess of 3 percent a year -- is not just hiding behind temporary setbacks. It is gone forever." The picture that Grantham paints is not so much an economic cliff, as it is a slippery slope. He concludes that, "The bottom line for U.S. real growth, according to our forecast, is 0.9 percent a year through 2030, decreasing to 0.4 percent from 2030 to 2050." And that's "... presuming no unexpected disasters, but also no heroics," just "muddling through."
In coming up with his economic growth forecast, Grantham cites a number of long-range trends that mitigate against the 3 percent annual growth rate that we have come to expect. They include a continued decline in the relative size of the manufacturing sector, reduced capital spending, and a shrinking workforce, but they also include environmental impacts and, most importantly, the impact of rising commodity prices for metals, minerals, and fuels.
While Grantham sees demographics playing a role declining U.S. growth rates, he's not suggesting that we boost immigration rates in a mad dash to expand the labor force. He points to Japan as an example of an "aging" economy that has managed to maintain low unemployment rates. And while Grantham acknowledges that the fracking of oil and natural gas in the U.S. is boosting economic growth, he suggests that it will be a "very temporary factor."
It would be easy to dismiss Grantham as an environmental doomsdayer, except that his forecasting record is the envy of the investment world and his firm manages close to $100 billion in assets. What sets Grantham's investment advice apart from the pack is that he is not focused on the short-term bumps in the road; he is always looking ahead to see where the road is going. Grantham studiously avoids being taken in by financial bubbles or stock market euphoria. He insists that everything ultimately reverts to the mean. The trick, of course, is determining what the "mean" is, how long trends can deviate from the mean, and when the mean is actually changing.
Grantham insists that climate change and resource scarcity are changing the financial and economic trend lines for the U.S. and the world. He sees record droughts and recent crop failures as preludes to far worse, and warns that scarcity and higher extraction costs will, in the long term, push commodity prices ever higher. While he acknowledges that speculation has played a role in commodity price boom, he sees cost as the primary driver:
The oil companies are doing nicely in profitability, but they are not rolling in money as they would be if finding and delivering costs were still at $35 or $50. Suspicious as I am about the ethics of oil companies, the current prices are clearly not a conspiracy. They are cost driven. The same applies, I believe, to most metals, although it is obvious that their prices did get way ahead of their costs in 2008 and 2011. Even agricultural costs have soared, as fertilizer and fuel costs doubled or tripled and the costs of pumping water and a host of other lesser inputs leaped upwards.
While Grantham's U.S forecast is grim, he sees even greater hardship for developing countries that are dependent on foreign imports for their survival:
... the braking effect on their economies from the rising costs and shortages of raw materials and, in many cases, the growing effects of climate damage on food, health, and flooding, will be felt much more severely by developing countries. Their resource intensity is far higher and their pollution damage often greater. Their share of consumption going to food and energy can often be a dangerous 25 percent to 40 percent, where ours in developed countries is typically less than 10 percent or 12 percent.
If Grantham's long-range economic forecast is even close to accurate, it has profound implications for the U.S. and the world. Concerns about a fiscal cliff or the collapse of the Euro pale in comparison. The end of growth as we have known it is a far bigger story... and a much larger challenge.