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The World in 2050:
How will the global
economic order change?
February 2017
Contents
Summary
Pg 3
1
Projected average
income levels
Pg 19
4
4
Projected relative
size of economies
Projected real
GDP growth rates
2
3
Pg 5
Risks to growth
Pg 22
5
The World in 2050: How will the global economic order change?
PwC
Pg 14
Implications for
policy and
business
Pg 25
6
February 2017
2
1. Summary
The World in 2050: How will the global economic order change?
PwC
February 2017
3
The World in 2050: 5 key messages
1
2
3
4
5
The world
economy
Shifts in
global
economic
power
Drivers of
global growth
Policy
implications
Business
implications
The E7 could
account for
c.50% of world
GDP by 2050, up
from 35% today.
Emerging
economies could be
six of the largest
seven economies in
the world by 2050
Emerging
economies will
drive global
growth.
Vietnam, India and
Bangladesh could
be three of the
fastest growing
larger economies
over this period.
To realise this
potential,
governments need to
implement structural
reforms to improve
macroeconomic
stability, diversify
their economies and
develop more
effective
institutions.
Rising incomes in
emerging markets
will open up great
opportunities for
businesses with
sufficiently
flexible and
patient strategies
for these fast
evolving markets.
The world
economy could
more than
double in size by
2050, assuming
broadly growthfriendly policies and
no global
catastrophes.
The World in 2050: How will the global economic order change?
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2. Projected relative size of economies
The World in 2050: How will the global economic order change?
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How have we modelled long-term GDP trends?
• Our model ignores short-term cyclical variations, focusing instead on long-term supply side fundamentals.
• We assume no major global catastrophes or political shifts that cut economies off from the flow of new technologies and ideas.
• We take the US as representing the ‘global frontier’ in terms of technology and productivity that other economies
seek to catch up with over time. US labour productivity growth is assumed to grow at a trend rate of 1.5% per annum.
• We use a robust model where GDP is driven by four main supply-side factors, using a Cobb-Douglas production function that
is a standard approach in the academic economic literature and widely used by the IMF, OECD and others in long-term growth
studies.
Working-age
population growth
Investment in
human capital
(education levels)
GDP in PPPs vs MERs
We focus on GDP at purchasing power parity (PPPs), but also
include GDP at market exchange rates (MERs).
•
The difference between GDP at PPP and MER estimates reflect
that price levels in lower income countries are generally
significantly lower than in advanced economies based on current
market exchange rates.
•
This means emerging markets tend to have significantly higher
GDP when measured at PPPs than at MERS.
•
In the long-run, the difference between the two estimates should
decline as faster emerging market growth pushes up price levels.
This is a very gradual process, however, so full price convergence
will still not be complete by 2050 in most emerging markets.
The World in 2050: How will the global economic order change?
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Investment in
physical capital
Catch-up with US
total factor
productivity levels
What has changed since our February
2015 report?
We have made two main changes to our model since 2015:
1.
All historical data has been updated to reflect the latest available
data. Our detailed assumptions on key model inputs have been
revised to reflect actual trends over the past two years.
2. We have reduced the assumed US trend labour productivity
growth rate from 2% to 1.5% per annum, reflecting accumulating
evidence that potential growth has fallen in the US. This can be
attributed to factors including the US’s ageing population, a
plateau of educational attainment and rising household and
government deficits generating financial instability.
February 2017
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The shift in global economic power from the G7 to the seven largest
emerging economies (the ‘E7’) will continue in the coming decades
2
3
4
By 2050, we project that the G7’s share of world GDP will fall to
only around 20%, while the E7 will increase their share to
almost 50% of global GDP at PPPs by 2050.
China is already the largest economy in PPP terms, having
overtaken the US in 2014. We project China could also be
the largest economy in MER terms before 2030.
India will also drive the shift in global economic power and
could overtake the US to be the world’s second largest
economy in PPP terms by 2050.
160,000
GDP in PPPs and MERs (constant, 2016 US$ bn)
1
Relative size of G7 and E7 economies in 2016
and 2050
In 1995, the E7 was only about half the size of the G7 in PPP
terms. By 2015, the two groups were around the same size.
Looking ahead, the E7 could be around double the size
of the G7 by 2040 (in PPP terms).
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
2016 PPP
5
Emerging economies are projected to dominate the list of the
largest economies in the long run, with Indonesia, Brazil,
Russia and Mexico taking 4th to 7th places in 2050.
2050 PPP
G7
2016 MER
2050 MER
E7
G7 = US, Japan, Germany, UK, France, Italy and Canada
E7 = China, India, Brazil, Russia, Indonesia, Mexico and Turkey
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US and Europe will steadily lose ground relative to the Asian giants
Projected GDP (PPP terms) in 2050
Europe’s share of the world economy
at PPPs could fall from around
15% to 9% over the next 34 years.
Increasing
GDP in PPPs
China’s share of world
GDP at PPPs could
increase to around
20% by 2050.
The US could fall to third
place in the global GDP
rankings by 2050, as its
share of world GDP at PPPs
falls to only around 12%.
Brazil and Mexico
could be larger than
Japan and Germany
by 2050.
The World in 2050: How will the global economic order change?
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India could increase
its share of world
GDP at PPPs by 8
percentage points to
15% by 2050.
February 2017
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Emerging economies will dominate the list of the world’s 10 largest
economies and increase their share of world GDP to almost 50% by 2050
Rankings of GDP at PPPs
Share of world GDP at PPPs
2016
China
2050
1
1
100%
China
90%
US
2
2
India
80%
India
3
3
US
70%
Japan
4
4
Indonesia
60%
Germany
5
5
Brazil
50%
Rest of the
world
Rest of the
world
E7
E7
Russia
6
6
Russia
40%
Brazil
7
7
Mexico
30%
Indonesia
8
8
Japan
20%
G7
UK
9
9
Germany
10%
France
10
10
UK
0%
G7
2016
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2050
February 2017
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By 2050, the E7 are projected to be significantly larger than the G7 even at
market exchange rates (MERs), driven primarily by the continued rise of
China and India
140,000
GDP (US$ bn at constant 2016 values)
120,000
E7 120%
larger than
G7
100,000
E7 67%
larger than
G7
80,000
60,000
China &
India
China &
India
40,000
20,000
US
China &
India
US
US
US
0
2016 PPP
2050 PPP
US
China & India
The World in 2050: How will the global economic order change?
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China &
India
2016 MER
Other G7
2050 MER
Other E7
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When looking at GDP in MER terms, the E7 still lags behind the G7 due to
the E7’s lower average price levels, but could overtake the G7 by 2030
Projected growth paths in PPP terms
Projected growth paths in MER terms
120,000
140,000
GDP in MERs (constant, 2016 US$ bn)
GDP in PPPs (constant, 2016 US$ bn)
160,000
E7
120,000
100,000
80,000
G7
60,000
100,000
E7
80,000
G7
60,000
40,000
40,000
20,000
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2050
2048
2046
2044
2042
2040
2038
2036
2034
2032
2030
2028
2026
2024
2022
2020
0
2018
2050
2048
2046
2044
2042
2040
2038
2036
2034
2032
2030
2028
2026
2024
2022
2020
2018
2016
0
2016
20,000
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The rise of China and, in the long run, India will gradually push down the
US and EU27 shares of world GDP at PPPs (broadly similar trends are
projected for GDP shares at MERs, but China and India are starting from
lower levels on that measure)
25%
Projected share of world GDP in PPPs
China
20%
India
15%
US
10%
EU27
5%
0%
2016
2018
2020
2022
2024
2026
2028
2030
The World in 2050: How will the global economic order change?
PwC
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
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We expect to see some other emerging markets take centre stage by 2050,
although this depends on long-term progress on structural reforms
20th
19th
14th
Biggest fallers
(GDP at PPPs)
32nd
28th
22nd
Vietnam
Philippines
Nigeria
Biggest risers
(GDP at PPPs)
Australia
Italy
Spain
19th
12th
15th
28th
21st
26th
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3. Projected real GDP growth rates
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We expect the shifts in global economic power we have seen since
2000 to continue in most cases in future decades
2
3
The top 15 fastest growing economies over the next 34
years will all be developing and emerging market
economies according to our projections.
Vietnam, India and Bangladesh have the potential to be
the fastest growing economies, with annual average growth
of around 5% over the period to 2050, but Chinese growth will
slow as its population ages and its economy matures.
4
E7 growth could average around 3.5% per annum
between 2016 and 2050, compared to c.1.5% for the G7.
5
Population growth will be a key driver of GDP growth in
many emerging markets, such as Nigeria, Pakistan and India.
But a key challenge will be too create enough jobs in these
economies for their young people.
Correlation between historical and projected
GDP growth at PPPs
Projected average annual GDP growth in PPPs (20162050)
1
Large emerging market economies will continue to be
key drivers of global growth, as their lower initial levels of
economic development provide more opportunities for catchup with current advanced economies like the G7.
6%
Vietnam
India
5%
Bangladesh
Nigeria
4%
Indonesia
Mexico
China
3%
Brazil
Turkey
UK
2%
France
Russia
Canada
US
Italy
Germany
Japan
1%
0%
The World in 2050: How will the global economic order change?
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0%
2%
4%
6%
8%
10%
Average annual GDP growth in PPPs (2000-2015)
February 2017
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Annual global economic growth is projected to average around 2.6% over
the next 34 years, slowing down over time as emerging markets mature and
populations age in advanced and some emerging economies (e.g. China)
Average PPP per capita growth p.a. (2016-2050)
7%
3.5%
6%
5%
2.7%
2.5%
4%
2.4%
3%
2%
1%
0%
-1%
-2%
0%
2%
4%
6%
8%
10%
Average PPP per capita growth p.a. (2000-2015)
2016-2020
The World in 2050: How will the global economic order change?
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2021-2030
2031-2040
2041-2050
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Population growth will support growth in most emerging markets, but
ageing populations could be a drag on growth in advanced economies and
emerging markets like China and Russia (unless people work for longer)
Real GDP growth broken down into:
1. Average population growth; and
2. Average growth in GDP per capita, which is closely related to labour productivity growth
Average real GDP growth p.a. (2016-2050)
6%
5%
4%
3%
2%
1%
0%
-1%
Average Pop Growth p.a %
Average Real Growth per capita p.a %
The World in 2050: How will the global economic order change?
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Average GDP growth p.a. (in domestic currency)
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China and India are projected to continue their current strong growth rates
to at least 2020, before slowing down progressively in later decades as they
mature (as happened to Japan, South Korea and other earlier emerging
economies in previous decades)
Average annual growth in GDP in PPPs
8%
7%
6%
5%
4%
3%
2%
1%
0%
Brazil
Russia
India
2016 - 2020
China
2021 - 2030
The World in 2050: How will the global economic order change?
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US
2031 - 2040
UK
EU27
World
2041 - 2050
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4. Projected average income levels
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Average incomes are likely to remain lower in emerging markets than the
G7 even in 2050, but they should close a significant amount of the gap by
then (e.g. China’s average real income level in 2050 similar to UK today)
2
3
4
The largest economy in the world in 2050, China,
only achieves a middling rank in terms of GDP
per capita (but still similar to the UK’s level today).
Despite overtaking the US by 2050 in total GDP at PPP
terms, India ranks only 28thof of the 32 countries
in our study in terms of GDP per capita in
2050. India’s average real income level then might be
similar to that in Russia today.
China and India are closing the gap with the top. In
2016, US GDP per capita was almost 9 times that of
India’s. By 2050, it may be only around 3 times
higher than in India (and twice Chinese levels).
GDP per capita is on the rise in the E7
GDP per capita (PPPs, 000s, constant 2016 US$)
1
With the possible exception of Italy, all of the G7
continue to sit above the E7 in terms of GDP
per capita in 2050. Russian average income is
projected to be broadly on par with Italy by that time.
100
90
80
70
60
50
40
30
20
10
0
5
While population growth will be a key driver of GDP
growth in emerging markets, it can have partly
offsetting effects on average income growth.,
particularly if job creation is constrained.
The World in 2050: How will the global economic order change?
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2016
2050
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In contrast to total GDP, we do not see such a marked shift towards Asia by
2050 in terms of relative levels of average GDP per capita
Negative population
growth in Japan, Russia and most of Europe
could help keep average incomes relatively higher as
labour shortages arise
Increasing GDP
per capita
The US continues sit
the highest of the G7
in our rankings of GDP
per capita in 2050
Nigeria, Pakistan and India will
experience some of the greatest population
growth to 2050, but growth in average
GDP per capita are projected to be
relatively less strong in these economies
The World in 2050: How will the global economic order change?
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5. Risks to growth
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A wide range of risks could see growth fall below projected potential rates,
particularly if there is a widespread retreat from globalisation – although
there could also be offsetting upside possibilities
We consider three scenarios, each one building on the
assumptions made in the previous one to create a
cumulative set of three possible downside risks – however,
there could also be upside possibilities for all three variables
For the most severe downside scenario (3), the size of
the world economy in 2050 could be around 20%
smaller than in our main scenario
1
2
3
Trend US labour productivity growth decreases by a
further 0.5 percentage points, from 1.5% to 1% per annum,
representing a deceleration in global technological progress
within the structure of our model
Convergence speeds for total factor productivity (TFP)
levels reduce by half (e.g. due to rising protectionism) and
trend annual US labour productivity growth decreases by 0.5
percentage points as in scenario 1
Investment to GDP ratios decrease by a quarter,
convergence speeds (for TFP levels) decrease by half, and
annual trend US labour productivity growth decreases by 0.5
percentage points.
GDP in PPPs (constant, 2016 US$ bn)
300,000
250,000
200,000
150,000
100,000
Main
The World in 2050: How will the global economic order change?
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Scenario 1
Scenario 2
Scenario 3
February 2017
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Reducing US labour productivity has a larger impact on G7 growth, while
the E7 are more sensitive to reduced TFP convergence speeds
Average annual GDP growth rate (2016-2050)
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
G7
E7
Main scenario
Scenario 1
The World in 2050: How will the global economic order change?
PwC
Scenario 2
World
Scenario 3
February 2017
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6. Implications for public policy and
business
The World in 2050: How will the global economic order change?
PwC
February 2017
25
Developing stable, high quality institutions will be critical to emerging
markets realising their full economic potential. Businesses need to develop
a global ecosystem of suppliers and partners across these markets.
For governments…
“I would particularly emphasise the critical importance of the quality of institutions in long-term economic success or failure. If we
look at the rise of the West, growth was supported by political systems that invested in public goods (including health and
education as well as physical infrastructure) and provided legal systems that protected property rights and provided a conducive
environment for long-term business investment.”
For businesses…
“There is no silver bullet, but it does put more of a premium than ever on having a business strategy that is dynamic enough to
respond to both the opportunities and challenges that emerging markets present. For large companies this typically involves
creating a global ecosystem of suppliers and partners to support development and marketing of products and services, focusing on
capturing most of the value in their ecosystem.”
-
Professor Michael G. Jacobides (LBS)
The World in 2050: How will the global economic order change?
PwC
February 2017
26
Diversification, public sector reform and creating a business environment
that encourages innovation will be critical to sustainable long-term growth
Views of senior PwC experts on China, Nigeria, Colombia, Poland and Turkey
“Looking ahead, China still has great potential for growth. Its
urbanisation process is still at a relatively early stage, and its
services sector has a lot of scope to catch up with economies
like the US. Reform of state-owned enterprises, if properly
handled, could shatter monopolies and create new business
opportunities worth trillions of dollars.”
- Allan Zhang, Chief Economist, PwC China
“Nigeria’s potential advantages for future growth include a
large consumer market, a strategic geographic location as a
hub for Africa, and a young and entrepreneurial population.
The first step in harnessing this opportunity requires
deliberate efforts to improve value-adding activity in the
non-oil economy, particularly in agriculture and services.”
- Dr. Andrew S. Nevin, Chief Economist, PwC
Nigeria
“Growth in Colombia over recent years has been driven by the financial services industry and the social services sector. The
Colombian government has also been actively promoting the agribusiness sector, as well as the industrial manufacturing sector
in order to promote long-term economic growth in light of falling commodity prices.”
- Gustavo Fernando Dreispiel, Senior Partner, PwC Colombia
“Poland’s new government announced a new programme of
economic development aimed at gradually shifting the
paradigm of economic development from wage
competitiveness to innovation and international expansion of
Polish companies.”
“If Turkey can overcome its short-term political
uncertainties and focus its attention on reforms in all needed
areas, the country can provide great long-term business
opportunities with its favourable demographics and
geopolitical position.”
- Mateusz Walewski, Senior Economist, PwC Poland
- Başar Yıldırım, Chief Economist, PwC Turkey
The World in 2050: How will the global economic order change?
PwC
February 2017
27
PwC contacts, services and insights
The World in 2050: How will the global economic order change?
PwC
February 2017
28
For more information on this study, please contact John or Hannah
from our Economics & Policy team in London
John Hawksworth
Hannah Audino
Chief Economist, London
Economist, London
E: [email protected]
E: [email protected]
For related PwC services and insights please see:
http://www.pwc.co.uk/services/economics-policy.html
http://www.pwc.co.uk/issues/megatrends.html
http://www.pwc.com/gx/en/issues/high-growth-markets.html
http://www.pwc.com/gx/en/ceo-agenda/ceosurvey/2017/gb
http://www.strategyand.pwc.com/
http://www.psrc.pwc.com/
The World in 2050: How will the global economic order change?
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February 2017
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