Morningstar - Q1 2022 - 24

Dispatches
TRENDS
GDP Growth Above Consensus Through 2025
The Morningstar equity research team projects
5.5% real GDP growth in 2021 and 4% in
2022, which are essentially in line with consensus,
according to The Wall Street Journal. However,
over 2023-25, analysts expect nearly 200
basis points more GDP growth than consensus.
The exhibit shows the U.S. real GDP growth
forecast, disaggregated into supply-side factors.
Analysts focus on the supply side because the
demand side of the economy will not be
constrained for the near future, thanks especially
to the prolonged impact of record fiscal
stimulus passed in 2020 and 2021.
The analysts' bullish view on GDP growth through
2025 compared with consensus is attributable to
their views on the long-run supply side of the
economy (known as potential GDP), particularly
in terms of the labor market.
Analysts see room for strong gains in labor force
participation due to tight labor markets (reflected
in the dark blue bars in the exhibit). They think
labor force participation was cyclically depressed
throughout the 2010s, in the aftermath of the
Great Recession, owing to weak labor
markets driven by persistently low aggregate
demand. Strong aggregate demand should create
very tight labor markets through 2025, drawing
marginal and discouraged workers into
the workforce and closing the participation gap.
The advent of near-term bottlenecks to supply
doesn't affect the analysts' view of the
U.S. economy's long-term productive capacity,
as these issues should be resolved. The only
potentially concerning aspect of the nearterm
data would be the labor market, where
there's been a somewhat slow recovery
in employment given the record high rate of job
openings. However, Morningstar analysts
don't think the labor market recovery is anywhere
near being completed.
Preston Caldwell is a senior equity analyst and head of
U.S. economics at Morningstar.
Carbon intensity declined in 2020, mostly
because of lower power demand during the
pandemic and a reduction in coal plant
output. For 2021, Morningstar expects an increase
in carbon intensity on the back of a partial
rebound of coal production.
Longer term, the key decarbonization driver will
be the 68% fall in hard coal and lignite
generation that Morningstar anticipates between
2019 and 2030. The reduction of coal
generation by 2030 has two sources: the national
phaseout of coal plants and the load factor
reduction of remaining plants because of
the 72% renewables surge that Morningstar
estimates by 2030.
Germany and Poland accounted for 67% of coal
generation in Europe in 2020. Germany has a
long-term deadline to phase out coal with a clear
road map, although the new coalition government
intends to extend the phaseout to 2030.
Poland has no deadline, although it plans to
close some of its largest coal plants in the 2030s,
to be replaced by nuclear reactors.
Labor Market Recovery Drives GDP Forecast
% Contribution to Growth
Labor Productivity
Hours Per Worker*
Employment Rate*
Labor Force % of Potential*
Potential Labor Force
GDP
8%
4
2.4
-4
-8
2007
2009
2011
2013
*Cyclical Labor Market Factors
Sources: U.S. Bureau of Economic Analysis, Morningstar.
2015
2017
2019
2021
2023
2025
Renewables' share in the power generation mix
will increase from 34% in 2019 to 57% in
2030 by Morningstar's estimates, short of the
65% required to meet the Fit for 55's new energy
directive's objective of a 40% share of
renewables in total energy consumption by 2030.
A key source of the downside is France, whose
renewables target is out of reach. Furthermore,
no significant amount of incremental renewables
generation is needed in France, since power
generation there already has a very low carbon
intensity thanks to nuclear plants, which
account for around 70% of total power production.
Morningstar projects that French renewables
24
Percentage of Market Return From Largest Stocks
Morningstar foresees European coal and lignite
plants' power output to fall by 128 terawatt-hours,
or 72%, between 2019 and 2030 because of
plant closures and the load factor reduction due
to the ramp-up of renewables generation. The
reduction in coal volume in Germany will account
for 41% of the total coal decline in the EU.
Morningstar projects that Polish power production
from coal and lignite plants will make up 27%
of the total European reduction.
https://www.morningstar.com/authors/2047/preston-caldwell
Morningstar - Q1 2022

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