The future of global growth

long-term perspectiveS: some background data and possible questions for discussion

A. Overview

Average annual growth per decade, in %

	World	Developed Countries	Emerging & Developing
1980-1989	3.2	3.1	3.5
1990-1999	3.1	2.7	3.7
2000-2009	3.6	1.7	6.1
2010-2020	3.8	2.1	5.2
2015-2020	3.7	2.1	4.8

Good news: according to IMF (outlook to 2018 in IMF autumn 2015 World Economic Outlook[1]), long term global growth outlook for the on-going decade and probably sometime afterwards is more than one sixth higher than in the two decades up to 2000. Increasing world growth rates in last decades was possible and will continue in the ongoing and possibly following decades even without further acceleration in growth in emerging economies due to their increasing weight in world GDP.

Bad/not-so-good news: already in the early 2000s, economic growth in advanced economies started to slow down, for a number of reasons (outlined below).

As a result, a gap relative to growth in emerging/developing countries opened up. In the 1980s, the prosperous Thatcher/Reagan years, there was no significant difference in GDP growth of advanced economies compared to emerging/developing economies. Today, the gap is at some 3.5-4 percentage points, apparently to stay for some decades to come.

The weakest region is Europe, The only exception there: Germany, but there the economy thrives to a large extent because of a Euro exchange rate that reflects the economic ‘strength’ of average of Eurozone.

Any long-term forecast is more a scenario than an actual forecast. It seems more important to analyse the main drivers of the probable future growth in order to understand the major currents, rather than focusing on numbers behind the comma.

B. Some reasons for slow-down and falling behind of growth in advanced economies

Let me mention a few of the drivers and other positive/negative factors (jokers, choke points) that I think are important, based on a somewhat simplified supply-side model.

1. Main drivers of economic growth

Availability/mobilisation of labour multiplied with productivity growth

• Reduced demographic dividend (share of people at active age in total population); further reduction ahead (from tailwind to headwind);
• lower number of newly educated people entering the labour force (further accentuated by high youth unemployment in Europe); IT revolution did not have a significant impact on productivity growth. Outlook unclear.

Availability/mobilisation of capital multiplied with improvement of the productivity of capital

• already high private debt, rather than saving that would be available for investment
• reduction in productivity of capital (return on investment, incremental capital-output ratio) as a result of pushing up capital requirements

2. Wild card: raw materials and energy (e.g., US shale gas)

• mainly positive for US, but with the low oil prices (for how long?) this perspective may have changed.
• further competitive disadvantage of Europe from highly priced and massively subsidised “clean energy”.

3. Choke points and major slow-down factors:

• Debt/taxation: present run for higher taxes: to cover explicit and implicit debt in the longer term, France will have to mobilise an additional 10.5% of GDP as tax revenue, Germany 10.1%, Italy, UK and US 9%. Assuming that the productive sector that has to finance this represents about half of an advanced economy, the burden on this productive sector will increase by double these percentages (CATO Institute).
• High and increasing cost of regulation (e.g., cost of US Presidents’ first-term new regulations: Clinton USD 9bn; GW Bush USD 8bn, Obama 37bn); politics of “inclusive growth”, its language (“greed”, etc.) discouraging efforts and success and its efforts for more re-distribution basically punishing success.
• Water (not only in California)

C. Developing countries

1. Positive demographic dividend; high growth in productivity from implementation of existing technology and efficient management practices, improved productivity from rapid urbanisation

2. Capital: still high savings and low debt; capital efficiency increases as capital markets and private investment further gain in importance.

3. Raw materials as important source of prosperity and growth for a number of countries (despite present slowdown in production): e.g., Mongolia as the country expected to show the highest economic growth worldwide in the decades to come.

4. Choke point: water for energy and mining.

D. Possible questions for the discussion:

How long the growth period in emerging/developing economies (e.g., unfavourable demographics of China)?

Possible role of migration to overcome demographic problems in advanced economies?

Role of new technologies?

Possible role of trade liberalisation (bilateral, regional, global)?

Risk that Western competitors (US) try to influence growth of the major Asian powers negatively?

Risk from water shortage?

Risks for private companies in advanced economies?

E. In conclusion

Forget the notion of ‘new normal’, at least for trhe time being, we are in the middle of an open-ended and highly volatile transition.

[1] http://www.imf.org/external/datamapper/index.php