Slower Growth - not always a bad thing
Published Saturday August 20th, 2011
Although he lived during the American Revolution, Thomas Paine's observation that "these are the times that try men's souls" certainly is applicable today as we look around the world.
Beyond some of the human tragedies now underway in places such as the horn of Africa, we have fairly broadly distributed economic challenges throughout the developed world. The causes for these troubles are many, but a common thread is excessive debt levels created by a long-running practice of spending more than revenues and borrowing to make up the difference.
It's a daunting problem, whether we look at the recently announced annual spending deficit here in our little province of $1 billion or at the challenges faced in Europe and the U.S. For perspective, one billion seconds ago you were 31 years younger - it was 1980. Governments and economic unions such as the EU are simply not structured to deal with these issues as quickly as the markets would like. Market volatility reigns while the market participants speculate about what will happen next and how or even if these issues will get resolved.
The impact of this uncertainty goes beyond market volatility. The resulting effect of volatility and uncertainty is that individuals and businesses wait to make spending and investment decisions. The more individuals and businesses don't spend, the more the economy slows down. The more governments are forced to reduce spending, the more things slow down.
This means that after a generation of chronic overspending using borrowed money (which resulted in over-stimuating economic growth), we are entering a period of relatively slower but more natural economic growth. Although some rail on endlessly about how terrible it will be, slower economic growth in and of itself is not a major problem for most people.
In a slower growth world where inflation is not a threat it's likely that interest rates will stay low for a considerable period of time - perhaps the next decade? Investors will either decide to accept lower interest rates on bonds and GICs or will look for alternatives that offer a higher yield. This pursuit of higher yield must be handled carefully. It was the pursuit of high yields that created the demand for the junk mortgage-backed securities and other collateralized debt obligations the American and other investment banks distributed around the world - up until the 2008 financial crisis.
In a slower growth world, great businesses (think of some of the blue chip businesses whose products and services we use now) will continue to be profitable, pay dividends and grow. From now until the end of time, people will need to eat, use medications, wash themselves and their things, will commute and travel, conduct financial transactions, need places to live and much more. You get the picture. No matter how low a nation's Gross Domestic Product (GDP) growth rate is (even when it's declining in recession), economic activity will continue and investors will have the opportunity to participate in the growth and income that comes from that business.
What we think will be challenging in the coming period as these necessary adjustments are made is market volatility. Times are changing and while the core underlying principle of capital markets remains intact, the place is being renovated back to its original, more sensible foundations: world capital markets based on sound underlying government finances, sound business and individual finances, where there is far less debt can only be an improvement.
Thomas Paine said something else that I believe applies to us today as well. It certainly applies to me as a father. He said, "If there must be trouble, let it be in my day, that my child may have peace." Our generation clearly had a big role to play in getting our collective finances where they are today. It's only reasonable we would play a role in cleaning them up.
If you have questions or concerns about your finances as the next chapter in capital markets unfolds, talk with your adviser.
Keir Clark is a senior wealth adviser, with Clark Wealth Management Group and branch manager at ScotiaMcLeod in Fredericton. His column appears every other Friday. He can be reached online at www.keirclark.ca or by telephone at 506-450-6465.
