Several days ago we presented an empirically correct model of real economic growth. The concept describing the evolution of real Gross Domestic Product (per capita) is very simple and is based solely on the age structure in a given developed country. It was empirically and statistically proved that the growth rate, g(t), of real GDP per capita, G(t), is driven by the attained level of real GDP per capita and the change in a specific age population, Ns. According to this model, the asymptotic growth rate of real GDP in developed countries can be completely characterized by constant annual increment A = const. All fluctuations around this constant increment can be explained by the change in the number of people of the country-specific age:
g(t) = dlnG(t)/dt = A/G(t) + 0.5dlnNs(t)/dt (1)
Equation (1) is the quantitative model that has been constructed empirically and tested statistically.
It is important to stress that the mainstream models such as Solow model and its successors are all based on an assumption that the rate of real economic growth is asymptotically constant. This assumption is empirically wrong and is rejected by statistical tests. We made no theoretical assumptions and our model came directly from data and was formulated at the initial stage of our empirical study. Therefore, we have a model that fits observations best.
We have already presented the cases of US and France in this blog. The next country under investigation is Germany. The best fit constant increment is (A=) $260 (1990 US dollars) and the defining age is eighteen years, as in France. The age distribution from 2002 allows a prediction at an 18-year horizon. Figure suggests a slow-down in 2009 and likely a deeper recession in 2011, with a year of growth in 2010. On average, the beginning of 2010s will be characterized by very poor performance of the German economy. It will be even worse than in the 1990s. The population trough in N18 observed the 2010s is likely a remote and decaying echo of the WWII, which was amplified by the reunification turbulence in the early 1990s. The rate of birth was suppressed by the uncertainty of socio-political future of Germany. In the late 2000s and early 2010s, the drop in N18 might be compensated by immigration. In that case, real GDP may grow due to the rising working age population, i.e. due to extensive factors.
Here, we would like to emphasise that the prediction of the 2009 slowdown could be easily obtained in 2002, i.e. seven years before it happened! The estimates of population age structure are slightly noisy, however. Otherwise, the agreement between the observed and predicted curves is excellent after some years of turbulence associated with the reunification.
Figure 1. Observed and predicted rate of real GDP growth in Germany after the reunification. The predicted curve is obtained from relationship (1) with A=$260. Upper panel: Original curves. Lower panel: The original curves smoothed with MA(3). One should not expect a recession period before 2011, but the year of 2009 is very close to recession
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.