Tuesday, February 07, 2017 9:41 AM / PwC
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After a year of major political shocks with the Brexit vote and the election of President Trump, it might seem brave to opine on economic prospects for 2017, let alone 2050.
However, I still think it is important to take a longer term view of global economic prospects that looks beyond the short-term ups and downs of the economic and political cycle, which are indeed very difficult to forecast.
Instead our approach in this report, based on a rigorous modelling approach, focuses on the fundamental drivers of growth: demographics and productivity, which in turn is driven by technological progress and diffused through international trade and investment.
Such forces saw America progress through the 19th and early 20th centuries to become the largest economy in the world despite a civil war, various other conflicts with foreign powers, three presidential assassinations, and numerous economic and financial crises.
These forces also helped global economic growth to bounce back strongly from two world wars and a Great Depression to reach record levels in the post-war decades. Looking ahead, we think they will see emerging economies come to dominate the 21st century. By 2050 we project China will be the largest economy in the world by a significant margin, while India could have edged past the US into second place and Indonesia have risen to fourth place.
The EU27’s share of global GDP could have fallen to below 10%. We also think the world economy will more than double in size between now and 2050, far outstripping population growth.
I think this kind of long-term view, looking beyond short-term economic and political cycles, is particularly useful for policymakers and businesses in areas like pensions, healthcare, energy and climate change, transport, housing and other types of infrastructure investment.
Challenges for policymakers
Of course, we should not dismiss political shocks like Trump or Brexit to the extent they point to deeper structural shifts, notably a populist backlash against globalisation, automation and the perceived impact of these trends in increasing income inequality and weakening social cohesion.
These trends pose real policy challenges across the developed world and beyond and, as we discuss in Section 4 of this report, there is no silver bullet to address these concerns. They require determined efforts by governments to boost the quality of education and training, and address perceived unfairness through well targeted fiscal policies. They also require real political leadership to resist calls for increased protectionism and maintain momentum on longer term issues like climate change and global poverty reduction.
Opportunities for business
From a business perspective, there is also a need to look beyond short-term economic volatility in both advanced and emerging economies and develop strategies that have the right balance of flexibility and patience.
As we discuss in Section 5 of the report, this requires a clear focus on identifying and building on core capabilities, while remaining flexible enough to ride out short term political and economic storms of the kind we have seen in both advanced and emerging economies in recent years.
Overall, though, I remain optimistic that governments and businesses can rise to these challenges and deliver the continued increases in global living standards that we project in this report.
Summary: The world in 2050
1. We project that the world economy could more than double in size by 2050, assuming broadly growth friendly policies (including no sustained long-term retreat into protectionism) and no major global civilisation-threatening catastrophes.
2. Emerging markets will continue to be the growth engine of the global economy. By 2050, the E7 economies could have increased their share of world GDP from around 35% to almost 50%. China could be the largest economy in the world, accounting for around 20% of world GDP in 2050, with India in second place and Indonesia in fourth place (based on GDP at PPPs).
3. A number of other emerging markets will also take centre stage – Mexico could be larger than the UK and Germany by 2050 in PPP terms and six of the seven largest economies in the world could be emerging markets by that time.
4. Meanwhile, the EU27 share of world GDP could be down to less than 10% by 2050, smaller than India.
5. We project Vietnam, India and Bangladesh to be three of the world’s fastest growing economies over this period. UK growth has the potential to outpace the average rate in the EU27 after the transitional impact of Brexit has passed, although we project the fastest growing large EU economy to be Poland.
6. Today’s advanced economies will continue to have higher average incomes, but emerging economies should make good progress towards closing this gap by 2050. This will open up great opportunities for businesses prepared to make long-term investments in these markets. But this will require patience to ride out the storms we have seen recently in economies like, for example, Brazil, Nigeria and Turkey, all of which still have considerable long-term economic potential based on our analysis.
7. To realise this growth potential, emerging market governments need to implement structural reforms to improve macroeconomic stability, diversify their economies away from undue reliance on natural resources (where this is currently the case), and develop more effective political and legal institutions.
In this report, we present our latest long-term economic growth projections, providing an update to our 2015 results. We project GDP to 2050 for 32 of the largest economies in the world, which together currently account for around 85% of global GDP.
We hope this analysis will be of interest to policymakers around the world, businesses making long-term investments, academics, students and economic commentators. These long-term growth projections will also feed into other PwC projects and reports.
Our analysis uses a robust long-term economic growth model from the academic literature that accounts in a rigorous way for projected trends in demographics, capital investment, education levels and technological progress to estimate potential long-term growth rates. We assume broadly growth-friendly (but not perfect) policies and no major civilisation-threatening global catastrophes (e.g. nuclear war, asteroid collisions) over the period to 2050. Full technical details of our methodology are contained in Appendix A.
We are aiming to identify broad long-term trends, abstracting from short-term economic and political cycles.We are not claiming to be able to make precise forecasts of GDP in 2050, which is clearly not possible looking that far ahead, but we do believe it is possible to trace out the broad shape of economic power shifts over this period. We also look at the impact of a range of alternative assumptions on our long-term growth projections (in Section 2.4 of the report).
To complement our modelling projections we also include:
· commentaries on five emerging markets (China, Nigeria, Colombia, Turkey and Poland) from PwC enior economists or partners in these countries;
· interviews with three leading academics - Professor Marvin Zonis, Professor Branko Milanovic and Professor Michael Jacobides – on the uncertainties around our projections, the challenge of income inequality, the need for institutional reform and the implications of our analysis for business strategy; and
· summaries of a range of other PwC research and case study analysis to draw out the implications of the long-term global economic trends we project for public policy and business.
GDP projections to 2050
Global economic growth will be driven by emerging market economies, which will gradually increase their share of world GDP over time
We project that the world economy will double in size by 2042, growing at an annual average rate of around 2.6% between 2016 and 2050.
We expect this growth to be driven largely by emerging market and developing countries, with the E7 economies of Brazil, China, India, Indonesia, Mexico, Russia and Turkey growing at an annual average rate of almost 3.5% over the next 34 years, compared to just 1.6% for the advanced G7 nations of Canada, France, Germany, Italy, Japan, the UK and the US.
We will continue to see the shift in global economic power away from established advanced economies, especially those in Europe, towards emerging economies in Asia and elsewhere. As shown in Figure 1, the E7 could comprise almost 50% of world GDP by 2050, while the G7’s share declines to only just over 20%.
In fact, China has already overtaken the US to become the world’s largest economy in purchasing power parity (PPP) terms1, while India currently stands in third place and is projected to overtake the US by 2040 in PPP terms. By 2050, France will no longer be among the world’s ten largest economies on this basis, with the UK falling to 10th place, while Indonesia could rise to 4th place by 2050 (see Figure 2). By 2050, six of the seven largest economies in the world could be today’s emerging economies in PPP terms according to our projections.
Figure 2: Projected GDP rankings (at PPPs)
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