According to Nikolai Kondratieff, economies worldwide have passed through five long waves of wealth since the invention of the steam engine in the eighteenth century. Where in the surf do we stand now?

DENNIS NACKEN: The recent financial crisis can be considered the mother of the sixth Kondratieff. In the past, transition periods between cycles have shown four characteristics that apply to what we see now: The potential of key innovations – personal computers and the information technology – has been exhausted. Information technology has dominated the fifth cycle, but buying a new computer now does not provide a significant increase in productivity. Second, economies have surplus financial capital which was clearly evident during the financial crisis. Third, societies are going through a period of severe recession and, last but not least, they experience social and economic upheaval as we can currently observe in financial regulation. These criteria indicate that the sixth Kondratieff is well under way even though the period of upheaval is not likely to come to an immediate end.

If the information technology has been exhausted as a key innovation, what will take its place for the next 40 to 60 years?

One of the main drivers of future growth will most likely be the healthcare sector, mainly due to global demographic change. However, the drivers of the sixth Kondratieff stem from two sources: Globalization and demographics lead to shifts in demand whereas environmental technology, bio- and nanotechnology as well as a holistic concept of health affect the supply structure. These megatrends combined with so-called basis innovations have the potential to influence economics, politics and society and will boost productivity in multiple economic sectors.

In what way will the health sector generate growth?

For a person age 85, average medical costs in Germany now stand at €12,000 per year – four times as much as for someone age 45 to 64 (source: German Federal Ministry of Health). Increasing life expectancy as well as rising world population – the United Nations estimate more than nine billion people on the planet by 2050 and they will all grow old – will further hike up the demand for health services. The money spent in this sector currently averages 9% of GDP in OECD countries and it is projected to increase by 3.5% to 6% of GDP by 2050.* But we will see increasing demand for health care services not only for quantitative but also for qualitative reasons. Taking provisions against falling ill and thus protecting human capital rather than treating a sickness after it has occurred will become more important for individuals as well as for employers. This trend towards a holistic understanding of health is particularly visible in the ageing societies of developed countries and will generate a new infrastructure and even new professions.

How will this translate into other sectors?

Obviously, growing old is expensive. The financial sector will have to provide solutions for old age provisions. Environmental technology and biotechnology will offer new products as well as new investment opportunities. Rising profitability and demand in this sector is reflected in share prices which proved to be resilient during the financial crisis. The key to sustainable growth lies in a more efficient use of resources and energy as demographic and climate change boost growth through a new mix of economics, ecology and social commitment.

How will this affect emerging markets?

They still appear to be tapping into the productivity reserves of the fifth cycle, the information technology. In China, 5% of the inhabitants own a personal computer and 22% have access to the Internet whereas in the US, the penetration rate for computers and Internet stands at 80% and 71% respectively.** The path of the developed countries towards a knowledge economy seems to have been mapped out already.

*OECD Factbook 2008: Economic, Environmental and Social Statistics
**International Telecommunication Union (ITU), The World in 2009: ICT Facts and Figures

Published by PROJECT M in March 2010

(Photo: gallerystock/Marge Ely)

Disclaimer
The materials on the PROJECT M e-zine are based on available sources verified at the time of release. However Allianz Global Investors AG ("Allianz Global Investors") does not warrant the accuracy, reliability or completeness of any information contained in this publication. Neither Allianz Global Investors nor its employees and deputies will take legal responsibility for any errors or omissions.
The PROJECT M e-zine is intended for general information purposes only. None of the information should be interpreted as a solicitation, offer or recommendation of any kind. Certain of the statements contained herein may be statements of future expectations and involve known and unknown risks and uncertainties that may cause actual results, performance or events to differ materially from those expressed or implied in such statements. The company assumes no obligation to update any forward-looking statement. The company assumes no obligation to update any information contained herein.