The Foreboding Theory of Secular Stagnation

For years after the Great Recession, economists scrutinized the market for signs of recovery.  What they saw were slowly rebounding numbers that indicated a less than stellar turnaround from the lows of 2008-2009.  For those of us involved in supply chain management and international trade, this was a point of concern.  Some economists used the term “secular stagnation” to explain why growth had been so sluggish, why the economy hadn’t rapidly reestablished its growth trajectory.  The theory holds that minimal market growth is the eventual equilibrium in a fully developed economy.  Its proponents believe that, in the long run, the endgame of a mature market is stagnation.  The question then becomes, does this theory provide a helpful framework for understanding the market?

Coined by Harvard economics professor Alvin Hansen, “secular stagnation” theorizes that the horizon towards which mature markets progress eventually becomes a boundary.  It holds that the upward trajectory of macroeconomic potential eventually hits a ceiling, where growth gives way to a long plateau.  The idea was first put forth in 1938, during the tail end of the Great Depression, and has reemerged to describe the economic downturn of 2008-2009 and subsequently lagging markets.  Believers in secular stagnation hold that markets will reach a state of maximum aggregate demand with minimal prospects for future growth.  They maintain that a set point exists where aggregate demand stalls out in relation to supply, resulting in a perpetually stagnant economy.

It is not coincidental that the term “secular stagnation” arose during the tail end of the Great Depression.  In 1938, after many withering years of financial loss and instability, many felt that the world economy was destined to remain low forever.  And now again, in the post Great Recession economy, some have wondered if signs of slow recovery in world markets means that the economy is ultimately destined to stay that way in the long run.

Keep in mind that the disparity in market behavior between the Great Depression and the Great Recession is dramatic, however.  The Great Recession bookends a drop in worldwide GDP between 2008 and 2009 of less than 1%, while during the Great Depression between 1929 and 1932, worldwide GDP dropped around 15% percent.  From the Q2 2009 low of $14.355 trillion in real GDP, the United States is up 20% to $17.271 trillion in Q4 2017, and per capita GDP increased from $47,000 to $52,000 from 2009 to 2016.

As far as supply chain concerns overseas, some economists say that China was one of the least affected markets during the Great Recession.  As early as Q4 2009, Chinas GDP growth rate rebounded to pre-crisis levels at 11.4% per year, and in Q1 2010 the GDP growth rate was above its long-run average at 12.2% per year.  In 2009, Chinas real GDP was $5.11 trillion, 7 years later, it was $11.2 trillion.  For businesses fearing a long-term contraction of international trade, those numbers are reassuring.  Whether or not secular stagnation is the true fate of mature markets, only time will tell.  But for now it appears that the economy has found the frontier once more.