Monday, July 14, 2014

2060 - What Lies Ahead for the Global Economy

While you have to swallow long-term projections with a few pounds of salt, an interesting study from the Organization for Economic Co-operation and Development, better known as the OECD, looks at the challenges facing the world's economy over the next fifty years.  The "Shifting Gear: Policy Challenges for the Next 50 Years" provides us with a glimpse of what may lie ahead in global economic growth and income inequality.  Several factors will have a long-term impact on the global economy, among them environmental pressures, an aging population and globalization.  

Here are a few of the highlights:

1.) Global Economic Growth:  Here is a bar graph showing how the relative contributions of both OECD and non-OECD nations to global GDP growth will change over the next fifty years: 

Global GDP growth will shrink from its annual average of 3.6 percent in the years between 2010 to 2020 to 2.4 percent in the years between 2050 to 2060, a rather significant decline.  Over the next fifty years, much of the growth will be in what are now emerging and low income economies with per capita GDP rising sevenfold in India and parts of Africa compared to a fourfold increase in the overall global economy.  It is projected that over the next fifty years, per capita GDP in China will be at the same level as the current level in the United States.  As the growth rate of the population in emerging economies slows down, the size of their workforce will shrink or at best remain stable, meaning that most of the growth in per capita GDP will have to come from changes in technology.

Another impact of the rise of the emerging economies will also slow immigration to the world's advanced economies.  This will put additional pressure on many advanced nations who are relying on immigration to prop up their aging workforces.  Estimates suggest that by 2060, the labour force could be 20 percent smaller in the euro area and 15 percent smaller in the United States as shown on this bar graph:

2.) Global Trade:  Global trade will show a marked change over the next fifty years with a major shift in the importance of non-OECD trade.  Currently, 25 percent of world trade takes place between OECD and non-OECD countries.  By 2060, this is projected to rise to 50 percent.  Currently, of the total global exports, 47 percent takes place within OECD nations; by 2060, this will fall to 25 percent.  Currently, only 15 percent of global exports take place within non-OECD nations; by 2060, this will more than double to 33 percent.

3.) Demand for Skilled Labour:  The demand for skilled labour is expected to change markedly with labour demands in emerging economies paralleling those in advanced economies.  The share of service-related jobs in emerging economies will rise and the share of less-skilled manufacturing jobs will shrink.  For example, in China, the share of high-skilled manufacturing will rise from 16 percent in 2010 to 21 percent in 2060 and the share of services will rise from 43 percent in 2010 to 49 percent in 2060.

4.) Earnings Inequality:  Even though overall global poverty levels are expected to drop, the increasing importance of well-paying highly skilled labour will result in continued polarity in individual prosperity.  The demand for highly skilled labourers will rise at a much faster rate than for less skilled labourers.  On average, an OECD nation will see pre-tax earnings inequality rise by 30 percent in 2060, pushing the level of inequality to the same level as seen in the United States today.  Here is a bar graph showing the rise in earnings inequality as calculated using the ratio between the 90th decile of earners and the 10th decile of earners among OECD nations between 2010 (in dark blue) and 2060 (light blue):

Note that in 2010, the United States had the highest level of gross earnings inequality among its OECD peers, a position that will change only slightly over the next fifty years as Israel takes over first place.

5.) Sovereign Fiscal Problems:  As we are all aware, governments in many OECD nations have shown a flagrant disregard for prudent fiscal management, allowing their debt-to-GDP ratios to skyrocket.  Here is a chart from Eurostat showing the level of government debt for all Members of the Eurozone at the end of 2013:

Note that of the major Member economies, Belgium, Ireland, Greece, Spain, France, Italy, Portugal and the United Kingdom all have debt-to-GDP ratios that are in excess of 90 percent.

The OECD notes that the fiscal adjustments needed to stabilize gross debt-to-GDP ratios at 60 percent by 2060 are substantial, coming in at an average of 7 percent of GDP for an average OECD member.  Here is a bar graph showing the budgetary readjustments that are necessary in 2014 to achieve the 60 percent debt-to-GDP ratio by 2060:

The world's advanced economies will suffer the most, being hit by a two-pronged shock of aging and slowing immigration which will have a significant negative impact on the growth of tax revenue as the decades pass.

6.) Climate Change:  The OECD suggests that economic damage associated with global climate change will continue to accumulate.  They estimate that greenhouse gas emissions will have doubled from 2010, resulting in lower agricultural productivity and higher sea levels.  These factors will have a strong and growing negative impact on global and regional GDP as shown on this graph:

Note that South and Southeast Asia are expected to see the greatest decline in GDP at almost 6 percent compared to a global average decline of 1.5 percent.  These declines do not include increased health care costs and losses in productivity that are related to local pollution. 

While projecting fifty years into the future is a bit of a stretch, it is interesting to see that the OECD's analysis suggests that growing income inequality, the impacts of too much government debt and climate change will still be with us, putting significant pressure on future economic growth.

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