The coming lost decade

The lost decade is a decade in the history of a country which there is widespread economic stagnation and high unemployment. It is also characterized by loss of confidence in the populace and widespread social strife. There is hardly any progress scientifically or politically. India had its share of lost decades in the 1960s and the 1970s. Usually lost decade is referred when people talk of the Japanese economy in the 1990s and the 2000s. Japanese economy was doing very well in the 1970s and the 1980s and was 60% of the US economy. Japanese competitiveness was at an all time high. Toyota, Honda, Sony and other Japanese companies were beating the US companies left, right and centre. The US could not compete on price, quality, and customer service and even in technology. Finally they had to resort to protectionist techniques and this led to a long term decline in American manufacturing. Following the real estate bust in Japan in 1989, Japan experienced low growth, deflationary pressures and huge stimulus packages which hardly resulted in growth. Japanese companies steadily began to lose in competitiveness and the country suffered a demographic decline marked by severe aging of the population. Post 2001, Japan’s population started decreasing and if trends continue Japan’s population will halve by 2050. Politically Japan is having a crisis in leadership with weak governments, frequent changes in prime ministers and loss of status as a world power. Socially, Japanese are aging and losing savings and any energy to make radical changes to offset the disadvantages. There are increasing cases of divorces, suicides and unemployment in Japan.

The lost decades of Japan could soon transform into a lost decades (or even a lost century) for Europe and America. Europe is especially facing the same problems that Japan is facing, aging of the population, growth of a welfare state, high unemployment and social exclusion for a section of society. In some ways Europe is even worse with a low savings rate, illegal immigration and lack of a strong export sector. It is definitely going to see a weak growth rate in the order of 1 to 2% over 2010-2020. Japan will see a growth rate of 1-2% over the same period. America is definitely more dynamic and should see a decadal growth rate between 2% to 3.5%.

The real black swan is China. China has seen unprecedented growth in the last 25 years. It definitely cannot sustain the same growth rate for the next 10 years especially with rest of the world slowing down tremendously. China has a huge construction sector and consumes more steel and cement than rest of the world combined. One day it has to end and that day will be in the 2010s. I will predict a decadal growth rate of 7 to 8%. India should also see a decadal growth rate of 7-8% doubling its economy in real terms in 10 years.

So in 2020 the biggest economy in Nominal GDP would be United States, followed by China, Japan, Germany, India, France, UK, Brazil, Russia, Italy and Canada. The world will definitely see a lot of changes in the decade 2010-2020. Not all of it will be positive. The decade will not be that much of a transformation in terms of technology or social change. It will be driven by deft maneuvering in a slowing world.