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In the mid-1990s Paul Krugman wrote one of his first books for the general public with the evocative title of The Age of Diminished Expectations. In hindsight, the 1990s turned out to be good for the US while today, more than 20 years later, Krugman's «age of diminished expectations» is probably an accurate description of the mood in the developed world.

After the huge blow dealt by the scope and duration of the Great Recession and the difficulty encountered in returning to brilliant growth rates, a certain pessimism has taken over the advanced economies regarding the future. Many economists interpret the current rock-bottom real interest rates (and their continuation in the future, as discounted in the financial markets) as proof that we are witnessing a secular stagnation in developed countries. Expectations are certainly limited, even if they are not exactly diminishing.

Such expectations are partly a logical consequence of the maturity achieved by the planet's most advanced economies. The historical progress made by countries in the euro area, for instance, has been huge. Throughout their working lives, today's retired generation has seen the country's average income multiply by 3.3 while the adults retiring in the coming decade will have seen the country's standard of living double during their active period. As a country progresses and becomes wealthier, it is natural for the rate of growth to lessen as there are fewer opportunities for its productive processes to incorporate innovations and new technologies.

However, although this process may be logical, that does not mean it is without impact on our societies. At the current rate of potential growth expected over the coming years, the young generation recently joining the labour market can only hope for the country to multiply its standard of living by 1.5 throughout their working lives. This is, naturally, an average figure and, since it covers a much more complex business and labour situation, many people could certainly experience an age of limited expectations; a lot of young people have serious doubts about their chances of enjoying a higher standard of living than their parents.

In Spain this drop in the rate at which the country's standard of living has improved, generation after generation, is even faster if we take into account the fact that today's retired generation achieved huge improvements starting from a very low level. That generation saw the country's standard of living multiply almost sixfold and their children's standard of living more than double, while the most their grandchildren can expect (based on current trends) is to improve their standard of living 1.5 times, as in the euro area as a whole.

Such long-term growth prospects have serious social and political implications. On the one hand these underlying phenomena help to explain the social tensions and political radicalism observed in many developed countries. Economic stagnation leads to tension as it makes policies of redistribution and social assistance much more difficult to implement.

From the point of view of economic policy, on the other hand, the developed world and particularly Europe should not see such stagnation as inevitable. In fact, given the current trends, although Spain and the euro area expect to multiply their income by just 1.5 over the next generation, the US figure is 1.8; far from impressive but only 0.4 pps below the rate achieved by the previous generation, a sign of how the US still leads the world economy.

In order to avoid or at least ease this secular stagnation, the challenge is to take over the frontier of the new tech generation and achieve an efficient, flexible productive system that is capable of incorporating new products, new services and new industries, and for all this to result in greater well-being for the population. Only if Europe truly takes this challenge on board will it see an end to this age of limited and diminishing expectations which we seem to have been fated to live through.

Jordi Gual

Chief Economist

31 October 2015

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