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“We can look ahead to 2%-to-2.5% real GDP growth instead of the 4% we have come to expect since World War II?” - By Michael Wilson, Chief Investment Officer, Morgan Stanley Wealth Management
Below summary by Anthony O'Brien
While there is still some disagreement around the sustainability of the current economic expansion and the equity market rally, there is little opposition to the idea that longer-term returns and growth are likely to be lower than normal.
Real GDP growth is mainly a function of three things: population growth, labour productivity and credit growth. Over time, population and productivity don’t change that much, leaving credit as the big swing factor, and it’s obvious that in the wake of the financial crisis, this factor is going to remain sluggish.
Many investors have taken this slower growth to mean a recession is imminent and hence, corporate profits and stocks are heading for a serious correction. The reality is that corporations have done a great job of operating in this new slow-growth environment and continue to generate record profits and impressive earnings growth.
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Frequently Asked Questions about this Article…
The article suggests that we can expect a real GDP growth rate of 2% to 2.5%, which is lower than the 4% growth rate we have been accustomed to since World War II.
Real GDP growth is primarily influenced by population growth, labor productivity, and credit growth. Among these, credit growth is identified as the major swing factor, especially in the aftermath of the financial crisis.
Some investors interpret the slower growth rate as a sign that a recession is imminent, fearing that corporate profits and stock prices might face a significant correction.
Corporations have successfully adapted to the slow-growth environment by continuing to generate record profits and impressive earnings growth, despite the overall economic slowdown.
There is still some disagreement regarding the sustainability of the current economic expansion and the equity market rally, although there is a general consensus that long-term returns and growth will likely be lower than usual.
Credit growth is a significant factor in real GDP growth, and its sluggishness following the financial crisis is expected to continue, impacting overall economic growth.
Current economic growth is expected to be lower than historical trends, with anticipated real GDP growth rates of 2% to 2.5%, compared to the 4% growth seen since World War II.
Despite the slow-growth economy, corporations have managed to maintain strong performance, achieving record profits and impressive earnings growth.
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