Global economy on the eve of a new long cycle of prosperity?

A name one encounters again and again when investigating the emergence of long-term (structural) cycles is that of the economist Nikolai Kondratieff. He observed long-term economic fluctuations in cycles of 40 to 60 years (so-called Kondratieff waves). According to his theory, these cycles begin with technological innovations, which then become the cornerstones of a prolonged economic upturn.

Provided, that is, that these so-called basic innovations permeate virtually all sectors of the economy and trigger new bursts of productivity throughout the entire economy. From the industrial revolution at the end of the 18th century until today, there have been five Kondratieff cycles. In the most recent information technology cycle, the PC and the Internet have driven radical changes in many aspects of daily life and of work.

Dennis Nacken, Senior Capital Markets Analyst at Allianz Global Investors

In all of those structural cycles excessive speculation and asset price bubbles have preceded the end of the cycle. But they have also served as an accelerator of a new upturn. Interestingly, a close examination shows that all four of the criteria marking the process of the reorientation of the economy seem to apply to the current financial and economic crisis:

  • The surge in productivity of the information technology in the 5th cycle appears to be slowly coming to an end
  • Until 2007, before the outbreak of the financial crisis, there was a substantial surplus of financial capital in the economy
  • The financial crisis became a global economic crisis, which had not been seen since 1930
  • Work is now underway on the creation of a new global financial regulatory architecture that is intended to form the basis for a sustainable economic and financial system

The recent financial crisis could mark a period of upheaval as described by Kondratieff. The 6th Kondratieff cycle has probably already begun, but the main and supporting roles seem not yet to have been assigned.

Globalisation and demographic change should play a major role in the next long economic cycle and are expected to result primarily in global shifts in demand. The removal of technological barriers brought about by the Internet has pushed globalisation to an entirely new level. Dennis Nacken, author of the study and Senior Capital Markets Analyst at Allianz Global Investors, says: "The Internet not only allows goods to be ordered at the press of a button from anywhere on Earth; it also makes the export of services possible." The volume of global trade has now quadrupled since 1987, despite the fact that global economic output (gross domestic product) has only doubled in the same period of time.

While the world is increasingly interconnected, there is also a growing demographic divide. By 2050, the world's population will assumingly have grown by about 40 percent to more than 9 billion people, but populations may shrink and age in half the world - in developed regions such as Europe and Japan. And in the other half, mainly in emerging countries, the population is likely to continue to grow and may remain relatively young.

While these megatrends could boost demand primarily in emerging countries, particularly in Asia, the path of the developed countries towards a knowledge economy seems already to have been mapped out. According to estimates by the Asian Development Bank, Asia will account for about 50 percent of global output by 2050 and China will likely have surpassed the U.S. and Europe in this area. The World Bank assumes that low-income countries will grow twice as fast as high-income countries in the coming decades.

Despite this shift and smaller growth the developed countries still have an important pioneering advantage in many areas, which reflects itself in the innovative strength and in the expenditures for research and development. Therefore it seems likely that the next cycle will begin in the developed countries, where the path seems marked towards a knowledge economy.

The key to a strong and sustainable economy in the next long cycle seems to lie in an increase in the productivity of resources and energy. "Growth will probably continue to be generated from a new mix of economics, ecology and social commitment. A structural change in the economy that can be dubbed "Eco-Trends"" comments Dennis Nacken. The High-tech industry is also expected to benefit significantly from the green transformation of the markets, because the demand for renewable energy, advanced environmental technologies, sustainable water management, recycling and more efficient propulsion technologies is rising.

The dovetailing of the 5th Kondratieff cycle with the 6th Kondratieff cycle, i.e. the connection of the area of information technology with the "green markets" is likely to continue to increase. For example, tremendous growth prospects are foreseen for the "Smart Grid", known as the "Internet of energy". In terms of increasing the productivity of resources and energy, the areas of nanotechnology and biotechnology are also of interest.

Both of these segments could play major roles in the new structural cycle by using new materials and new processes to make many sectors more environmentally friendly through the use of fewer resources and less energy. As interdisciplinary technologies that find application in other areas, such as environmental, electrical and medical engineering, their significance is likely to continue to increase.
Last but not least the healthcare sector could also be an important engine for economic growth in the 6th Kondratieff cycle. Health is now viewed less as a "condition" than as a resource and less as a cost factor than as a driver for economic growth and employment.

Dennis Nacken: "As a result of this paradigm shift, the economic significance of the industry is expected to continue to grow. New and expanding markets and product worlds are expected to develop around the concept of "holistic health", in the sense of physical, psychological, environmental and social health." The driving forces are global demographic change, progress in medical technology, increasingly shifting to health maintenance and increasingly commodisation of the health sector.

Whether megatrends on the demand side, such as globalisation and demographics, or megatrends on the supply side, such as environmental technology, the areas of very small structures or holistic health: all have the potential not only to trigger long-term productivity increases for the global economy, but also to influence society as a whole. The TMT (= Technology, Media, Telecommunications) bubble and the recent financial crisis may mark the beginning of the 6th Kondratieff cycle, even though the period of upheaval following the financial crisis is not likely to come to an immediate end. Dennis Nacken concludes: "However, long-term investors would be well advised to use the current crisis as an opportunity to get in early on the 6th Kondratieff wave."

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