Where will growth come from is a question that we ask ourselves time and time again. As European economies continue to contract and bank lending dries up, this question again weighs heavily on our mind.

As the rate of change of economic growth of the 2009 trough continues to disappoint, the notion of a new era of little to no growth has gained increasing credibility.

Case in point: after roughly $9 to $10 trillion of balance sheet expansion by the world’s major central banks over the last five years, the rate of global GDP growth has narrowed from five per cent to 3.5 per cent, according to the IMF, with more risk to the downside than upside.

For advanced economies, the news is even worse, with growth likely to remain well below two per cent annually for some time. The investment implications are only now beginning to be felt, and are likely to be seen in lower implied multiples for equities.

The assumption that the S&P Index in the US should trade at or near its historic average P/E multiple of 15x will increasingly be challenged.

In Australia we seem to be experiencing ongoing profit warnings and negative news on what seems like a daily basis. Retailers continually downgrade profits and paint grim pictures of the consumer who seems to have just stopped spending. The recent interest rate cut is now a distant memory and depending on who you talk to the banks are shut for business.

In his recently published book titled “The End of Growth” Richard Heinberg makes the following point.

We have become so accustomed to growth that it’s hard to remember that it is actually a fairly recent phenomenon. Over the past few millennia, as empires rose and fell, local economies advanced and retreated while world economic activity overall expanded only slowly, and with periodic reversals. However, with the fossil fuel revolution of the past century and a half, we have seen economic growth at a speed and scale unprecedented in all of human history. We harnessed the energies of coal, oil and natural gas to build and operate cars, trucks, highways, airports, airplanes and electric grids all essential features of a modern industrial society.

Through the one-time-only process of extracting and burning hundreds of millions of years’ worth of chemically-stored sunlight, we built what appeared (for a brief, shining moment) to be a perpetual growth machine. We learned to take what was in fact an extraordinary situation for granted. It became normal.

But as the era of cheap, abundant fossil fuels comes to an end, our assumptions about continued expansion are being shaken to their core. The end of growth is a very big deal indeed. It means the end of an era, and of our current ways of organizing economies, politics, and daily life.

That the end of growth comes at a time when the world’s major economies are drowning in debt and global crude oil output is struggling to grow even modestly, are not mere coincidences. Heinberg offered some useful insights on this confluence of events that apply today: [We] have created monetary and financial systems that require growth. As long as the economy is growing, that means more money and credit are available, expectations are high, people buy more goods, businesses take out more loans, and interest on existing loans can be repaid. But if the economy is not growing, new money isn’t entering the system, and the intereston existing loans cannot be paid; as a result, defaults snowball, jobs are lost, incomes fall, and consumer spending contracts which leads businesses to take out fewer loans, causing still less new money to enter the economy.

This is a self-reinforcing destructive feedback loop that is very difficult to stop once it gets going.

The periodic selloffs in oil prices such as we are experiencing now are very much consistent with Heinberg’s hypothesis.

As early as 2000, petroleum geologist Colin Campbell discussed a peak oil impact scenario that went something like this. Sometime around the year 2010, he theorized, stagnant or falling oil supplies would lead to soaring and more volatile oil prices, which would precipitate a global economic crash. This rapid economic contraction would in turn lead to sharply curtailed energy demand, so oil prices would then fall; but then as soon as the economy regained strength, demand for petroleum would recover, prices would again soar, and as a result of that the economy would relapse.

This cycle would continue, with every recovery being shorter and weaker, and each crash deeper and harder, until the economy was in ruins. Financial systems based on the assumption of continued growth would implode, causing more social havoc than the oil price spikes would themselves directly generate.