Previous posts have described how the 18 year economic/real estate cycle operates.  In our stylised diagram illustrating how the cycle unfolds, we are of the view that Western economies have now been through its cyclical crash and recovery phase that lasts on average 4 years and are now in the first expansion of the cycle.

The post examines some of the trends that will determine how large the next cycle will be.

 

How big will the next cycle be?

We are of the view that this next cycle will be the biggest ever.  To say again: we think that more wealth will be created in the next 10-15 years than in any equivalent period in human history.  It’s going to be a period of enormous wealth creation.  We advise not paying much attention to those with a bearish outlook on the world economy.

The normal expansionary phases of the economic cycle are going to benefit from the following growth-enhancing trends.

1. Relentless technological innovation

The internet and personal computing have fundamentally altered the way we communicate, do business and interact socially.  But I think that this revolution has only just begun.  We are only just getting to the point where product and service design can can now be premised upon the widespread access to powerful mobile computing power, allied to high-speed interconnectedness of the web.  It’s at this point that the focus shifts from the development of better and faster access to the application of this technological power to our everyday lives.  In the not too distant future, our cars will drive (and park) themselves; computers will learn, and adapt to their environment as humans do; we may travel into space for a holiday; our medical professionals will have instant access to real time biomedical data and analysis of our vital signs. Pipe dreams some of these may be, but they indicate the scale of humanity’s creative potential in our present era.

To take a more concrete example.  We are now starting to see the possibilities of this level of computing power applied to areas such as manufacturing, material science and so on – for example the development of “additive manufacturing”, otherwise known as 3-D printing.  For us, if the technology continues develop on its current trajectory, we do not think it an overstatement to suggest that we could be at the start of a second, computer-driven, Industrial Revolution that will radically alter not only the quality, speed of production and prevalence of highly customised goods but also how production itself is organised.  This has massive implications for the structure of our labour markets, the cost of production and so on.

2. Reduction in energy costs

There is an energy revolution underway in the US.  In the US this is based on use of new technology to exploit previously inaccessible gas and oil resources (often referred to as “shale gas” and “tight oil”).  Not only are energy costs in the US falling dramatically, the US is now a net producer and will potentially be the largest single producer of oil in the next few years.  This will make US manufacturing much more competitive but will also reduce its dependence on the Middle East – with significant geopolitical implications.  A PwC estimate suggests US manufacturers will save an annual $11 billion (around a third) on natural gas expenditures by 2025, while the new industries that have sprung up to extract this energy will employ one to two million people.  All of these factors are incredibly bullish for the US economy and there will be knock on effects for other countries (some quite positive).  While Europe and other parts of the world are still playing catch up on the energy front, technically the largest shale reserves in the world are in China so the energy revolution should spread elsewhere.  Since the price of energy underpins the cost of almost everything, the impact could be felt almost everywhere.

3. The rise of the Asian, Latin American and African consumer.

The most populous nations on earth are now starting to experience levels of economic development at which they can command the sort of goods and services that middle class Westerners take for granted.  The scale of demand is incredible.  Already numbering almost 2 billion people predominantly young and upwardly mobile, people their current annual spending is around $7 trillion (around 10% of global GDP) but by 2020 this will have trebled and will account for almost one quarter of global GDP.   Added to this is the urbanisation dynamic: the size of the capital investment required to house and move them to and from work, and to support their leisure activities is simply staggering.  And this trend will be unceasing.  Some estimate that the labour force in India will, by the middle of the century, surpass the combined labour forces of both China and the USA (the next two most populous nations on the planet).

This is likely to be the strongest global growth driver throughout the 21st century.

4. Global capital

All growth needs capital investment.  When capital is constrained, such as during downturns, growth is inhibited.  But we now live in a time of capital superabundance.  Even in 2010, at the height of the global financial crisis, the estimated total of global capital was around $600 trillion.  As more and more wealth is created over the course of the next cycle, global capital will increase disproportionately, hunting for yield.  This could create a virtuous cycle of investment, wealth creation, further investment and so on.  True, this brings with it the risk of fuelling asset bubbles, but with such relentless technological innovation and at this stage of the 18 year cycle it is as likely that such capital will be put to productive investment that massively enhances global growth prospects.

5. Kondratieff Waves

The 50-60 year cycle of alternating higher and lower commodity prices was described in a previous post.  We are currently in a K-wave upswing; and with each upswing we see huge innovation and wealth creation, particularly in countries that are resource rich. This further adds to the already bullish scenario.

 

These are five key dynamics that we believe will drive forward the next cycle.  Despite the economic troubles that the developed world in particular has faced over the last 4-5 years, the world nevertheless is moving into the next cycle from an incredibly high base.  The next 10-15 years are going to bring about prodigious wealth creation and the real challenge will be to ensure that the gains are enjoyed equitably.

 

To find out more on how we can help you understand economic cycles, please visit our Reports page.