When I was a younger economist, I harboured more apprehensions about the world approaching its demise – or at least the global economy. Yet, paradoxically, as I’ve aged, my perspective has shifted to increasingly acknowledge the gradual improvement of our world over time.

This blog post is a testament to that sentiment, underlining the need to harbour not just optimism but profound optimism about future growth.

Indeed, like many, I am acutely aware of the current global challenges – the draconian regulatory overreach, widespread lockdowns, school closures, and massive inflationary monetary policies, coupled with evidently unsustainable fiscal policies. These phenomena have been prevalent in both Europe and North America, painting a somewhat grim picture of our present circumstances.

Additionally, I have long maintained a sceptical view of China’s economic trajectory, predicting a significant deceleration in its growth. Back in 2014, on this very blog, I expressed doubts about China’s potential to become the world’s largest economy, citing numerous indicators pointing towards a stagnation in growth.

Time has proven these predictions accurate, and the trend seems set to continue unless there is a radical shift in the Communist Party’s approach towards market reforms, democracy, human rights, private property, and free enterprise. Despite the passage of time, my optimism on this front remains reserved.

Equally concerning is the threat from Putin’s Russia and Europe’s heavy reliance on Russian oil and gas, not to mention the increasing trends towards de-globalisation and the sharp escalation in geopolitical risks. In many respects, the current global landscape mirrors the challenges of the 1970s, characterised by geopolitical tensions, economic stagnation, and high, unstable inflation.

However, just as the 1970s gave way to the 1980s, marked by significant supply-side reforms in both the US and Europe, and the adoption of more rule-based fiscal and monetary policies, there is potential for a similar transformation in our current era. These reformative trends, which continued into the 1990s, further accelerated economic growth, suggesting a potential pathway out of our current predicaments…

…and into a future marked by renewed economic vitality and technological progress. It’s essential to recognise that despite the apparent parallels with the past, the world of today is fundamentally different, particularly in terms of technological advancements and global interconnectedness.

I am reminded of my youth in the 1990s

In 1995, I obtained my Economics degree from the University of Copenhagen, shortly after the end of the Cold War.

This period heralded a significant opening of the global economy, with the benefits of a rule-based economic policy, low inflation, and healthy public finances becoming increasingly evident in the latter half of the 1990s and the early 2000s. These developments were not only authentic but also marked a gradual yet transformative shift in the global economic landscape.

The rise of the internet and mobile telephony during this period also represented true technological milestones. Initially, I, like many economists, was slow to recognise the full potential of these advancements and in that sense, I probably was not much different from Paul Krugman, who famously said, “By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.”

Economists often view technology as a ‘residual’ – a component of growth unexplained by increased labour or capital. However, its critical role in driving growth is far more significant than traditional metrics might suggest.

Despite the challenges of recent years, including the 2008 financial crisis and its aftermath, the drastic responses to the pandemic in 2020-21, and the geopolitical tensions arising from Russia’s actions and China’s authoritarian shift, there is, therefore, reason for optimism.

The year 2023 has witnessed two notable technological breakthroughs: Novo Nordisk’s weight-loss medication and OpenAI’s ChatGPT.

These innovations have the potential to drive significant societal and economic benefits, mirroring the transformative impact of the internet and mobile technology in previous decades. In fact, they might even represent bigger, positive, and long-lasting supply shocks to the global economy.

These developments underscore the importance of technology in overcoming regulatory and economic challenges.

AI will be everywhere in 2024

AI offers the promise of significant productivity enhancements across various sectors, including finance, law, and healthcare. By embracing these technologies, we can potentially address some of the most pressing issues of our time, such as healthcare efficiency and financial regulatory compliance.

As we approach 2024, it’s clear that we are at the cusp of a new era, one that is likely to be characterized by significant productivity boosts from both medical and technological advancements. This potential for growth and improvement, despite the current geopolitical and economic challenges, provides a strong basis for optimism.

Just to give an obvious example of where AI will be making a huge difference – banking. Today, probably 10-15% of all those employed in the European banking sector work with compliance, dealing with anti-money laundering and ensuring banks uphold the enormous amount of financial regulation that has been implemented globally since 2008.

I think it is very likely that the implementation of AI in the banking sector (and the wider financial sector) will significantly reduce the effective burden of this regulation, and I would not be surprised if within the next 1-3 years, we see many banks improve productivity by 10-20%.

We are likely to see this type of productivity gains in other sectors as well. For example, I find it hard to think of any law firm in the US or Europe that will not, within the next year, implement AI as a completely integrated part of their daily work.

Similarly, we are already seeing examples of AI effectively conducting diagnostics on patients better than many doctors in various fields, and going forward, AI has the potential to completely transform global healthcare systems. Perhaps we can finally make a real leap towards prevention rather than treatment of illness.

So AI on its own offers an enormous potential for boosting productivity growth in nearly all sectors of the economy. But that is not the only innovation that is presently boosting global growth.

Novo Nordisk: Boosting the World’s Weightiest Economy

The Danish pharmaceutical company Novo Nordisk – now Europe’s largest company measured by stock market capitalization – has significantly impacted the Danish economy and is set to continue doing so. Its influence, however extends beyond Denmark, particularly through its diabetes and weight-loss medications, Ozempic and Wegovy, with potential significant impact on the global economy, especially the American economy.

Obesity, particularly severe obesity, involves enormous healthcare costs. In the United States, the rate of obesity has increased markedly since the 1980s. Now, approximately 40% of the population is obese, leading to stagnation in average life expectancy and making obesity-related diseases like diabetes and heart disease among the leading causes of death.

A Danish study from 2021 showed that healthcare costs for obese individuals are double those for individuals of normal weight, significantly contributing to the national healthcare burden in Denmark. The reduction of severe obesity through medications like Ozempic and Wegovy could provide a substantial economic boost.

Obese individuals are also less productive, more likely to be unemployed, and earn lower wages. This translates into substantial economic impacts, such as higher rates of work absenteeism among severely obese workers compared to their normal-weight counterparts.

A reduction in obesity in the U.S. could lead to an improvement in the economy. Halving the number of obese individuals could result in a 2% increase in overall wages and a significant rise in GDP if we assume as numerous studies shows that obese women have salaries 10% lower than normal weight women (corrected to age, education and experience).

While the widespread adoption of weight-loss medication in the U.S. is uncertain, especially considering its cost, the potential impact on the U.S. economy is substantial.

From a financial market perspective, increased American economic growth could be reflected in various sectors, particularly healthcare. However, industries like fast food might experience a downturn, as observed in the recent decline in American food and beverage stock prices, coinciding with the rise in Novo Nordisk’s stock.

The potential macroeconomic effects of Novo Nordisk’s medications are significant, not just for healthcare but for consumer spending patterns as well. A shift in spending away from food could redirect funds towards other sectors, potentially balancing the cost of the medication.

In conclusion, Novo Nordisk’s innovations in diabetes and weight-loss medications hold the potential to significantly influence not just the Danish but the global economy, particularly the U.S. Their potential to reshape consumer behaviors and the broader economic landscape is a development worth close attention from both economists and financial market analysts. This underscores the broader theme of our discussion: the transformative power of technology and medical advancements in shaping our economic future.

How it looks in an AS/AD-model

Hence, we have two major positive supply side shocks playing out at the moment and we should expect them to play for some time to come.

We can illustrate that in a traditional AS/AD model (but in growth rates rather than in levels). In the model, we assume that the impact of anti-obesity medicine and AI will have longer-lasting effects on productivity growth and will play out for some time, which we illustrate in the model as a positive shock to the long-run aggregate supply curve (LRAS).

In this model, the vertical axis represents inflation rates, and the horizontal axis shows real GDP growth rates. The initial long-run aggregate supply curve (LRAS) is at point A, where inflation is at p0 and real GDP growth is at y0.

The positive supply shock from the effects on the labor market and the reduced healthcare costs pushes the LRAS curve from LRAS₀ to LRAS₁, which in turn pushes down inflation to p₁ and pushes real GDP growth up to y₁ (point B). This is essentially a simplified version of the real business cycle model where growth is driven by productivity gains and shocks rather than by aggregate demand shocks.

The important thing to notice here is that we are seeing both growth re-accelerate and inflation continuing to decline. If this scenario plays out, I would certainly not be surprised to see US inflation inch down toward 1% and real GDP averaging 3% or more throughout 2024.

This certainly looks like a bit of a goldilocks scenario, but nonetheless, I think that it is a probable scenario for the next 1-2 years. However, it is also a scenario that could challenge the Federal Reserve in the sense that inflation in this scenario will drop below and remain below 2% without any signs of a slowdown in US growth. In fact, we will likely see the opposite.

And this is in many ways what the markets are telling us at the moment with both market inflation expectations inching down and the US stock market continuing to move higher. There can be a number of reasons for this, but it is normally so that when inflation expectations decline the absence of financial market volatility then it is normally good news – news of a positive supply shock.

It should also be noted that while for example the fall of communism starting in 1989 and opening of the global economy was a quite gradual process that last at least 20 years. On the other hand he impact of Wegovy is happening right now and I personally doubt that obesity will be a major global health problem in 10 years and we can only imagine the impact of AI, but it is happening right now and similarly I think we will see the impact on productivity of implement of AI in for example he banking sector very, very fast.

If anything – and I rarely try to second-guess the markets – the markets are not optimistic enough about growth. That being said we are here talking about macroeconomics – not necessarily where markets are headed from here, but I must admit that I am significantly more optimistic about 2024 than I was about 2023 so enjoy the coming productivity boom and happy new year!

Lars Chrisensen

lacsen@gmail.com (contact for media requests and advisory work)

+45 52 50 25 06

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