How will the next ten years look for the world economy’s growth? Four different scenarios of how 2025 will look have been developed by McKinsey & Company based on a number of near and long term factors affecting G-20 economies. Particularly the long term effects of urbanisation, technology and globalisation are expected to be decisive, as well as how stimulus initiatives are unwound and reforms implemented. The best scenario projects G-20 growth at 3.8% annually, with the low ball scenario a mere 2.5% annual growth.
In an article from McKinsey & Company’s McKinsey Global Institute, titled ‘Shifting tides: Global economic scenarios for 2015–25’, the consulting firms explores four possible forecasts that may await the global economy between now and 2025.
Globally, the past ten years have seen widely divergent economic conditions between developed and emerging economies. Europe, while growing solidly before the crisis, has since fallen into negative territory. The UK and the US have both managed to pick-up their game to grow at pre-crisis levels. In emerging economies growth has been considerably higher and more sustained; with China only recently slipping below 7%, while India continues to perform strongly. South Africa, Brazil and Russia have, however, seen considerable drops in their growth rates since the crisis.
A number of factors have sent shocks through the global economy however. Greece and slow growth in the EU have provided significant turmoil in recent years, while the slowdown in the Chinese economy recently had the World Bank’s Chief Economist commenting that it had “just switched on the seat belt sign. We are advising nations, especially emerging economies, to fasten their seat belts.”
McKinsey’s analysis highlights that the factors creating turbulence in the world’s growth trajectory over the coming ten years, flow from a number of macroeconomic changes, some near term, some longer term. Near term factors include interest rate conditions and energy prices. One issue is the persistent problem of weak aggregate demand relative to overall economic capacity. A central concern from economists is whether the persistently low interest rate policies are distorting rather than bolstering the demand picture. Interest rates remain essentially negative in many of the major western economic zones, with potential shocks from expected rates hikes globally. Energy prices also remain stubbornly low, with positive and negative consequences depending on energy dependence/production status of the country involved.
The longer term conditions expected to affect global growth are related to changes to demographics globally, technology and globalisation. Particularly, western countries will see their population age and infrastructure continue to be more and more congested as urbanisation continues. The effects of demographic changes include decreases in productivity, decreases in demand and increases in the cost of healthcare and pension loads. To maintain economic prosperity the consultancy finds that specifically European nations will need to find ways of increasing productivity and labour participation of older workers and marginalised groups.
Uncertainty factors are also expected to play a role in the coming decades as technology continues to bring rapid changes and the world is globalised further. Technological innovation has reached a level in the major economies where significant structural changes are in process or have already occurred. Digitisation has transformed the telecommunications, media, financial-services, and retail sectors, and industry 4.0, 3D printing and the Internet of Things (IoT) are expected to push forward further changes for manufacturing and health.
To consider different contingencies that may come to affect the global economy, the advisory selects two major factors and centres four scenarios on how these factors obtain with respect to each other. Along one axis, McKinsey considers monetary stimulus and energy prices to inform the path to the longer-term outcomes. The longer-term factors urbanisation, aging, technological innovation, and global connectivity anchor the four scenarios.
In scenario one, global synchronicity, self-sustaining recovery is achieved through stimulus injections. The US and Japanese economies are coaxed into sustainable growth, while China is able to transform its economy seamlessly to one of domestic consumption. India becomes the fastest growing economy following internal reforms. Technological innovation improves exports in developed countries, and aging populations are put to work, lowering their social burdens. Scenario two, pockets of growth, sees uncoordinated efforts to resolve structural and near-term demand challenges lead to uneven success and difficulties in international economic policies. India, China and the US see sporadic growth while Japan and the EU remain depressed.
Scenario three, global deceleration, sees low but stable global growth as navigate near-term demand challenges, but structural challenges linger. International linkages are somewhat strengthened, leading to new opportunities for growth. Scenario four, rolling regional crisis, sees global volatility and weak growth as stimulus plans fail to bring about improvements in demand. Long term structural issues are not resolved. Technological development remains isolated as companies lack incentive to invest, while globalisation falters.
The different scenarios also come with different levels of development in growth for the major economies. Scenario one for instance, sees G-20 growth hit 3.8% annually on average, with India at nearly 8% while the US comes in at 3% and the EU at 1.5%. Scenario two sees more modest 3.2% average growth across the G-20, with India at 6.6%, China at 6.3% and the US at 2.7%. The EU does considerably worse in this scenario, at 0.7%. Scenario three sees G-20 growth at 3%, with India still grows above 6%, the EU does slightly better under this model at 1.1% while the US drops to 2.2%. The final scenario sees G-20 growth drop to 2.5%, with China and India growing just above 5%, while the EU drops to 0.4% and the US to 1.9%.