Whither global growth?
In a timely (but I suspect unintentional) nod to the challenges currently faced by the Greek economy, a recent report from the McKinsey Global Institute has raised serious questions about the global economy's ability to build a sustainable future. Not only has government debt grown in absolute terms (and relative to GDP) but so has corporate and household debt in many of the 47 countries included in the study. As the graphic below illustrates, in 2014 total global outstanding debt stood at $199tn, equivalent to 286% of global GDP, an astonishing $57tn increase from 2007. This has occurred at time of supposed austerity and fiscal responsibility in the aftermath of the financial crisis.
The report makes the point that developing countries account for approximately half of the increase in debt and this can be perceived as "healthy financial deepening" and necessary for continued expansion and inclusion into the global economic system. However, China's debt has soared, racking up a four-fold increase from $7tn in 2007 to $28tn in 2014. This fact has been at the very centre of a scenario risk-based analysis we have been conducting over the last couple of months for a leading French bank, seeking to minimize the impact of unexpected future events on a consumer finance JV they are operating in China. This rapid growth in debt has been fueled by a well publicised real estate boom and the rapid expansion of the shadow banking sector, leading to a debt to GDP ratio higher than that of the US or indeed Germany. While many experts believe this debt is manageable, there are a number of worrying concerns. As the Financial Times pointed out recently in "China: Overborrowed and overbuilt", the level of local government debt is very high, possibly unsustainable and many of the their loans are collatralised against (over-valued) real estate. Meanwhile, in a reverse of the trend elsewhere in the world, the lightly regulated shadow banking sector continues to grow, representing nearly half of new lending.
Conventional economic theory dictates that not all debt is bad, quite the reverse in fact. Credit is seen as a necessary tool for funding growth and stimulating economic activity. However, the build up of debt needs the counterweight of appropriate monitoring, deleveraging and discharges to avoid the excesses of cyclical credit booms and their resultant busts. Perhaps more importantly, such tools should also prevent the long-term structural build up of unsustainable levels of debt that essentially mortgage our future forever. Perversely, such excessively high structural debt may hinder growth over the long-run.
For business leaders and policy makers securing growth over the long-term and not getting too caught up in the short-term economic cycles remains the key challenge. As the McKinsey report illustrates, the unprecedented growth we have experienced over the last 50 years has been driven by a combination of population growth (at 1.7%) and productivity growth (at 1.8%), delivering in a global compounded GDP growth rate of 3.8%. To put that in perspective, the size of China's economy today is the same as the entire global economy back in 1964.
I would argue that there are a number of longer-term, structural drivers, both challenges and opportunities that will determine the global economy's ability to grow over the next 50 years.
The challenges include:
While the overall global population is forecasted by the UN to grow from 7.2 billion today to 9.6 billion by 2050, the actual rate of growth will slow. We won't even come close to doubling the world's population as we did over the last 50 years. This decline in growth rate, combined with an aggregate ageing, will result in hitting "peak workforce" in most counties over the next 35 years and in all regions by 2050.
Dependency ratios (the % of the population aged over 65 being supported by those of working age) will increase dramatically, especially in Japan and Western Europe - see the graphic below.
To compensate for the decline in working age population (in absolute terms in a number of economies and in relative terms in many more), productivity will need to grow by 80% over the next 50 years if we are to experience the same level of economic growth that the world produced over the last 50 years. If we don't see such an increase, current projections indicate a fall in the long-term global economic growth rate to 2.1% (down from the last 50 years at 3.8%, as previously mentioned).
As we age, the solvency of our social systems will be tested. In many cases we will need to pay higher levels of tax to support our older populations and ever-more expensive healthcare.
For similar reasons, we may see a higher focus on saving vs. consuming, also negatively impacting economic growth
Those parts of the world with growing young populations will have to successfully integrate them into the workforce. No trivial task. One million young people in India will enter the labour force every month for the next 20 years (Asian Development Bank, 2011)
Of course it is not all bad news. There are a number of positive trends that will potentially boost growth over the next 50 years:
Firstly, of the 80% productivity enhancement required to make up for the slowing growth in population, 75% of those innovations already exist somewhere in the world. As best practice, they just need to be codified, communicated and deployed somewhere else.
Urbanisation will continue to be a determining factor in shaping the global economy. 54% of the world's population already lives in cities, forecasted by the UN to reach 66% by 2050. Cities have always been our centres of wealth creation and innovation.
There are already 28 mega cities (urban centres with over 10 million inhabitants) with another 12 scheduled to be created by 2030, the majority of those will be in Asia, mirroring a broader economic shift to the East.
In supporting this trends, there will be an increased appetite for capital to invest in new housing, office buildings, and port capacity. Indeed, the required investment in global infrastructure, to keep pace with urbanisation, has been estimated at $41 trillion between 2005 and 2030 (Booz & Co. 2013).
We will see a continued blurring between developed and developing nations. In aggregate the world is still getting richer. An additional one billion consumers will be added the the global middle class in the next 5 years alone.
Of course, exactly how these forces play out, which ones dominate, where and how much economic growth we will see in the future, remains the multi-trillion dollar question. Watch this space!