Understanding the ‘New Normal’—The Challenge of Secular Stagnation

This first in our series of briefing papers on building An Economy That Works explores the underlying phenomenon of ‘secular stagnation’—a long-term decline in the rate of growth of the Gross Domestic Product (GDP). The paper examines the evidence, explores the causes and discusses the implications of what some now call the ‘new normal’. It finds that:

• trend growth rates in GDP across the OECD declined from a peak of 4% per year in the mid-1960s to a little over 1% half a century later;
• trend growth rates in labour productivity declined from 4% per year to 0.6% per year over the same period;
• in the UK, there is a clear rise and fall pattern in labour productivity growth since the early 20th Century, with a peak in 1967 and a sustained fall since that time;
• over the last five years, trend labour productivity growth has remained below 0.3%, lower than at any time since records began in the mid 19th Century.

Perhaps most surprisingly, this analysis suggests that the rise of digital technologies has neither reversed nor even halted this long-term decline in labour productivity growth in the UK. The paper identifies four potential causes of the decline:

• an increasing price volatility in vital economic resources such as crude oil;
• a decline in the underlying quality of such resources – as measured for instance by the energy required to extract them and make then useful to society;
• a structural shift in advanced economies away from mining and manufacturing and towards services; and
• changes in the structure and organisation of the financial sector.

The first three could help to stimulate the transition to a sustainable economy: services are typically less damaging than mining and manufacturing activities and a decline in the use of crude oil could contribute to our carbon reduction targets. The final item on the list is troubling for two reasons. Firstly, there is evidence that these shifts in financial architecture have contributed to higher levels of inequality within advanced economies. Secondly, the changes themselves were motivated by the desire to stimulate economic growth. In other words, the very policies designed to prevent economic instability have ended up contributing to it.

Faced with this conundrum, it is clear that ‘more of the same’ will not deliver an economy that works for everyone. This paper argues that in order to make progress it is useful to re-frame four fundamental foundations on which the economy is built: enterprise, work, investment and money. Though it is beyond the scope of this paper to elaborate on these foundations in detail, we propose here the broad directions of travel, in which we frame:

• enterprise as a form of service
• work as a vital means of participation in society
• investment as a commitment to the future; and
• money as a social good.

Future briefing papers in this series will develop these themes in more detail.

The Policy Paper can be downloaded in pdf (2.6MB). You may also be interested in our recent working paper, outlining ‘The Post-Growth Challenge‘.