BERKELEY – The recent G-20 meeting of finance ministers in Saint Petersburg confirmed that the debate between growth and austerity is over – at least for now. With protracted recession in Europe and slowdowns in emerging markets, concern about budget deficits has given way to apprehension about growth. In July, the International Monetary Fund revised its global growth forecast downward for the second time this year.
Both Japan and the United States stand out as bright spots in the subdued global outlook, but for different reasons. In Japan, Prime Minister Shinzo Abe has unleashed a combination of aggressive monetary and fiscal expansion along with promised reforms of the labor market, corporate governance, regulation, and trade.
In response to rapid and bold stimulus measures, Japan’s economy is expected to grow at a rate of around 3% this year – one of the highest rates among advanced economies – and the Nikkei index rose 80% in the six-month period ending in May of this year. Now Abe has signaled his intention to move forward with tough structural reforms. If he delivers, his policies will be game changers for Japan.
In the US, the story is one of continued recovery as the headwinds slowing growth dissipate. State- and local-government budgets are improving, the housing market is strengthening, and households are deleveraging and repairing their balance sheets.
Counterproductive and excessive fiscal austerity at the federal level has dampened growth this year, but the private sector has proved more resilient than expected. Under current law, fiscal contraction is slated to ease next year and monetary policy is likely to remain supportive, so most forecasters predict an acceleration of growth.
But growth prospects could be undermined by another bruising political battle over the federal budget, resulting in deep spending cuts. The current Republican rhetoric in the House of Representatives portends additional fiscal austerity.
Earlier this year, the Congressional Budget Office warned that the potential US growth rate has declined as a result of years of subpar investment rates, the aging of the population, and smaller productivity gains. Every year of below-capacity growth means lower growth capacity in the future, owing to lost investment, erosion of worker skills and experience, and diminished risk-taking.
Still, there are often-overlooked reasons for optimism about America’s future potential growth. A recent McKinsey Global Institute study identifies five mutually reinforcing “game changers” that could have a significant effect on GDP growth, productivity, and employment in the US by 2020: shale energy, big-data analytics, exports in knowledge-intensive industries, infrastructure investment, and talent development. Two of these – shale energy and big-data analytics – build on ongoing technological breakthroughs in which the US has a strong lead and depend primarily on private-sector action, not macroeconomic or structural policies.
US production of shale gas and oil has been growing by more than 50% annually over the last five years. As a result of increasing supplies, US natural-gas prices have declined by two-thirds since 2008 and are likely to remain significantly lower than prices in the rest of the world at least through 2020. This price advantage will enhance America’s competitiveness as a manufacturing location, particularly for energy-intensive activities.
The US has the largest recoverable shale-gas reserves and the second-largest recoverable shale-oil reserves in the world. It also enjoys a technological lead in shale-energy technologies, and it already has a vast network of pipelines, refineries, and ports in the energy sector that can be repurposed for shale gas and oil (though much more investment will be needed).
Growth in shale energy will mean more investment, production, and jobs in the energy sector itself. Lower gas prices will boost manufacturing production, particularly in downstream industries like petrochemicals and primary metals that use natural gas as fuel and feedstock.
Growth in energy and energy-intensive industries will fuel additional demand, output, and employment across a wide swath of supporting activities, including transportation, construction, and professional services. Overall, McKinsey estimates that growth in shale energy could add 2-4% to annual GDP and create up to 1.7 million jobs by 2020.
But extracting shale energy involves environmental risks and uncertainties, among them groundwater contamination, higher methane emissions, and potential seismic effects. And shale gas emits CO2 when burned, even though it has half the carbon content of coal and has played a significant role in cutting US carbon emissions to mid-1990’s levels.
Not surprisingly, the President of the Natural Resources Defense Council, an admired environmental group, recently remarked that “fracking is about the most complicated thing I have encountered.” More research on the environmental risks and benefits of shale energy, and the development of new standards and regulations to control these risks are required.
Big data and advanced analytics are another technology-driven game changer for US growth. As more data are generated, stored, and transmitted in digital form, new data sets relevant to personal and business decisions are growing exponentially. As a result of advances in computing power, the advent of cloud computing, and new software tools, more of these data sets can be quickly analyzed and used by businesses to reduce costs, boost productivity, and create new products and services.
Big data and advanced analytics can also reduce costs and enhance efficiency in health care and government, and can create value for consumers through greater product variety and quality, as well as enhanced convenience – benefits that are not captured in GDP statistics.
McKinsey estimates that big-data analytics could add about $325 billion, or 1.7% to annual GDP in the retail and manufacturing sectors, while generating up to $285 billion in productivity gains and cost savings in health care and government by 2020. The potential savings in health-care costs would ease pressures on government budgets and release resources to boost growth in the rest of the economy.
New information and communications technologies were game changers that boosted the potential growth rate of the US economy in the 1990’s. McKinsey’s research suggests that shale energy and big-data technologies will be game changers with similar benefits for the economy’s potential growth over the next several years.