Slow global growth will be "the defining trend of our lifetime," says Joe Davis, Vanguard's chief economist and head of the firm's investment strategy group. In the first keynote address at this week's Morningstar ETF conference being held in Chicago, Davis explained that the compounded annual rate for global growth is projected to be just 2% over the next 50 years, almost half the 3.8% rate of the past 50 years.
For investors, that means much more modest gains than in the past, or more specifically 3% to 6% annual gains in a portfolio split 60/40 stocks vs. bonds compared with 7.3% in 2014, 9.8% over the past 30 years and 8.7% since 1926, says Davis.
The biggest determinants of future global growth are the U.S. and China – they're the world's two largest economies, and they're headed in opposite directions, says Davis. The U.S. economy is growing while China's economy is slowing, dragging down emerging markets with it.
China is the biggest "tail risk" for the global economy, says Davis. 'If China experiences a recession and growth contracts [further], that would lead to a global recession."
China's current growth rate is well below the 7% the government says it is, closer to 5%, says Davis. "For the next decade 5% is not the floor but the ceiling for China's GDP growth," says Davis. He blames China's real estate slump, not its very volatile stock market, for the deceleration.
Real estate construction is 10% of China's economy – double the ratio in the U.S. in 2007, when its housing market collapsed, and housing accounts for about 43% of Chinese household wealth compared with 23% in the U.S. in 2007, says Davis. On the flip side, mortgage debt is just 16% of China's GDP compared with 76% of U.S. GDP at the height of the housing crisis.
Another risk in China, says Davis, is the large number of state-owned enterprises, many with negative cash flow, and of companies that combine state and private ownership where the state is largely in charge. "The state has to exert less control over allocation of capital," Davis says.
