By Robert Stock Technology is creating a lasting environment of faster GDP growth, according to Gav...
By Robert Stock
Technology is creating a lasting environment of faster GDP growth, according to Gavyn Davies, chief international economist at Goldman Sachs International.
However, Tony Dye, former chief investment officer of UBS Phillips & Drew, disagrees, arguing that the growth in today's markets is merely a bubble.
The two debated the topic of whether technology had created a lasting environment of faster GDP growth without inflation at the third annual Threadneedle investment conference.
The theme, "Is it different this time?" was supported by Davies, who argued that higher trend growth, dampened economic cycles and disinflation are indicators of a new and lasting paradigm resulting from technological productivity gains.
Dye took a more sceptical view and said the current market position is a bubble.
IFAs at the conference who were able to vote through handheld devices, largely endorsed Davies' view, with over 85% saying that they believed that it truly was different this time.
Davies said that recent and dramatic US productivity gains were the start of a sustained period of productivity gains feeding through from technological breakthroughs beginning 15 years before.
He compared this phenomenon to the electricity boom which began at the turn of the 20th century, but which took until the 1920s to feed through into rapid productivity gains. The period 1920-37 reflected a "learning" period when industry had to work out strategies to put electricity to work productively.
Davies said that between 1996 and 1999 annual productivity growth had risen to 2.66%, compared with 1.61% between 1991 and 1995. The US and UK lead the way in productivity gains, followed by other English-speaking and Scandinavian countries.
More highly regulated countries have struggled to follow. Japan, he said, was using its high capital expenditure inefficiently. He acknowledged that the market was still pricing itself to achieve new all-time highs, thus creating uncertainty, but he did not think that this would lead to a stock market crash.
Dye said that investors in all eras suffer from "chronocentricity" a syndrome where they always believe that it really is different this time. He said that the "new era" was a fallacy proved by repeated assertion and added that current stock market conditions had all the necessary prerequisites of a bubble with low inflation, high growth and falling savings.
Dye said: "In these times large companies outperform and this is what we have had. The key element of a bubble is the change in human behaviour. People believe it is a permanent state of affairs and central banks ignore it because of low inflation.
"As the bubble develops people spend more and more of their income and that raises the growth rate. Alan Greenspan should have followed up his 'irrational exuberance' comments by putting up interest rates. Once it gets to this point it is almost impossible to do anything."
Dye said that if this is a bubble, and only time would tell, it could have drastic results. He added: "Stock markets don't recover for decades and if it is truly a new era, it has already been discounted in the prices of stocks."
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