GDP: Is 50 Years Long Enough For a Trend?

Attention Conservation Notice: presents data showing that the rate of growth of per-capita real GDP in the large advanced economies is steadily declining and will fall below zero within the next two decades.

This blog is about global economic growth--specifically, the arguments (if I can use the term broadly) that people make about its desirability and possibility this century. I had intended to start with a few backgrounder posts, summarising a little of the background knowledge essential for thinking about problems of this type, and about this domain of study. 

But no! Instead, let's jump in and wade through some numbers. (Cue Brad DeLong with Rudy Dornbusch's jeweller-plumber-pig taxonomy...)

What can we say about economic growth if we try to minimise our assumptions? We'll assume ‘real GDP’ is a meaningful index of economic welfare (without worrying at all what it actually is), and we'll use numbers from the St. Louis Federal Reserve's marvellously easy-to-use FRED repository, thus assuming that FRED is a good store of good numbers.  How are the numbers doing? What do they tell us?

OK, more assumptions. First, the big countries matter the most for global growth. Even if Tuvalu suddenly starts growing really fast, it'll be a long time before it is big enough to have a noticeable impact on the global figure. Not this century.

Second, what matters to people are per-person figures. If Nigeria's GDP (whatever that is) grows 5%, but at the same time its population grows 5%, from the point of view of an ordinary person, nothing has changed.

Third, the ‘advanced’ economies (as they proudly style themselves) represent a kind of end-state towards which other countries will tend to move over time. Therefore, what happens in the advanced countries will eventually happen everywhere.

Let's look at year-over-year changes in GDP per person in the big advanced economies. If growth were constant, this number should be the same each year: a chart of year-over-year percentage change in GDP should be a flat line. Of course there will be deviations above and below--there's always weather--but overall, the trend should be flat. So, is it?

Take it away, FRED. First up, the USA:

USA per-person GDP growth year-over-year for the period 1961 to 2011, with linear trend.

Yep: a simple depiction of GDP growth as fluctuations around a secular trend matches the evidence pretty well. 

(Lots of writers on the topic of GDP growth talk about "periods of high growth" and "periods of low growth," and stationary points in the trend caused by technology shocks. In climate science and in finance, people have learned not to do that kind of cherry-picking. Start with a large deviation away from trend, and finish with another, and you can make it look as though the trend is something else...for a while. Random noise, in the temperature signal or in stock prices, is random noise. Perhaps the same is true in the "GDP per person" signal. With 50 data points, we have, perhaps, enough numbers for the trend to start to dominate the random noise.)

The United States' rate of growth in production per person is on a downward trend which, extrapolated, reaches zero in 2032. Meaning that after 2032, each person in the United States starts to become less well off than they were the previous year, at least to the extent that GDP matches personal welfare. Every year from 2032 onwards.

But perhaps the United States is exceptional?  Let's look at the other large advanced economies.

Japan:

Fluctuations about a linear trend again here. A declining trend here too? Oh dear.

Who's next? Germany?  OK.

A declining trend again. It seems reünification caused a large but short-lived spike in production growth, after which, growth returned to its trend.

Next up, either France or the United Kingdom, depending on whose country-size list you trust.  The United Kingdom is interesting, so let's have a look at it:

Overall, the UK shows a flattish trend, but the later part of the chart seems to show the same declining trend as the other countries seen so far. The first part, from 1960 to about 1975, seems to show relatively stable growth. Let's look at the post-Thatcher period:-

Warning: insufficient data error!  But the prototrend is suggestive.

Although there are not enough data points in this interval to say anything with confidence, what data there are seem to fit the pattern. Time will tell.

Onwards! A vous, la France!

Perhaps we should say downwards.

And lastly Italy:

Summary, with some gobbledygook words.

Overall, our know-nothing assumption of a linear trend fits the data. Perhaps surprisingly, the trend is the same everywhere, and it points downwards.

Of the top six advanced market economies, the ones that have been in the growth business the longest and for which we have long sets of numbers, five show a steady decline in per-capita GDP growth--a decline that means that GDP per person is about to start shrinking, if it hasn't already started doing so.  The other country, the UK, seems to have delayed the trend for about thirty years, but it might also have succumbed. Time will tell.

Interpretation

This does not bode well for economic growth in the 21st century. The countries that are already big are about to start shrinking, so any growing that other countries do will be working against this headwind. Do we know what's causing the trend? (Rhetorical question.) Stay tuned for some speculation.