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The World in 2050
Does the global financial crisis change the long-term outlook?
John Hawksworth
Head of Macroeconomics
PricewaterhouseCoopers LLP
Porto, 12 December 2008
Agenda
1. Global financial crisis and short-term economic outlook
2. Key results from PwC long term economic growth model:
- Relative growth rates and size of economies by 2050
- China vs India
- other key emerging economies
3. Implications for European business:
- potential winners and losers in next 10 years
- longer term shift to a low carbon economy
4. Summary
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12 December 2008
Slide 2
7
6
5
4
Long-run average = 3.2%
3
2
1
0
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
Real growth (%)
World GDP growth has been above trend since 2004 …
Source: World Bank up to 1997, IMF for 1998-2009 (using market exchange
rates to aggregate world GDP)
PricewaterhouseCoopers LLP
12 December 2008
Slide 3
… but is now expected to move sharply below trend due to the
global financial crisis
7
6
5
4
Long-run average = 3.2%
3
2
1
0
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
Real growth (%)
Forecast
Source: World Bank up to 1997, IMF for 1998-2007, PwC for 2008-9 (using
market exchange rates to aggregate world GDP)
PricewaterhouseCoopers LLP
12 December 2008
Slide 4
Anatomy of a Crisis: Stage 1 – global boom driven by easy
credit and low prices of goods from China/E7 (2004 to mid-2007)
E7* growth
high
Goods prices
down
G7 growth
high
Housing
bubbles
Inflation
down
*E7 = largest seven
emerging economies
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Credit
boom
Interest
rates low
12 December 2008
Slide 5
Anatomy of a Crisis: Stage 2 – double hit from credit crunch
and rising commodity prices (mid-2007 to mid-2008)
E7 growth
still high
Commodity
prices up
Credit
crunch
?
G7 growth
slowing
Housing
bust
-
Inflation
up
+
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?
Interest rate
dilemma
12 December 2008
Slide 6
Anatomy of a Crisis: Stage 3 – banking crisis deepens while
commodity prices fall back (September 2008 to date)
?
Commodity
prices down
E7 growth
falls sharply
Banking
crisis
G7 move into
recession
-
Inflation
down
+/?
-
+/?
-
PricewaterhouseCoopers LLP
House prices
fall further
Interest
rates down
12 December 2008
Slide 7
Broad-based decline in global growth now expected
Annual % growth
10
8
6
2007
2008
2009
4
2
0
-2
China
Russia
Brazil
US
Euro area
Source: IMF, PwC
Risks clearly weighted to the downside in the short term
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12 December 2008
Slide 8
How long will the effects of the global financial crisis last?
Short term (1-2 years): major downward effect on world growth
Medium term (3-5 years): gradually fading effects, though build-up of public
debt could slow recovery (but less so in China than US/EU)
Longer term: should not significantly change potential growth unless there is
an unprecedented global depression and/or a return to protectionism
PricewaterhouseCoopers LLP
12 December 2008
Slide 9
Original 2006 study covered the 17 largest economies in the
world based on GDP at PPPs (World Bank estimates)
G7 plus Spain, Australia and South Korea
E7 economies
- BRICs (Brazil, Russia, India and China)
- Indonesia, Mexico and Turkey
Extended March 2008 study: also covers 13 other emerging market
economies with potential to be in top 30 economies in the world by 2050
PricewaterhouseCoopers LLP
12 December 2008
Slide 10
Long-term GDP growth model structure
Growth driven by:
- Investment in physical capital
- Working age population growth (UN projections)
- Investment in human capital (rising average education levels)
- Catch-up with US productivity levels (at varying rates)
Real exchange rates vary with relative productivity growth
Note: results are not forecasts, but rather indicate growth potential
assuming broadly growth-friendly policies are followed and no major
disasters (e.g. nuclear war, radical climate change)
PricewaterhouseCoopers LLP
12 December 2008
Slide 11
How big are the Chinese and Indian economies?
Index (US = 100)
120
100
80
GDP at market
exchange rates
GDP at purchasing
power parities (PPPs)
60
40
20
0
US
Japan
China
India
Source: PwC estimates for 2007 using World Bank data for 200612 December 2008
PricewaterhouseCoopers LLP
Slide 12
Age vs Youth
Fast ageing
Younger for longer
• Russia
• India
• Korea
• Indonesia
• Japan
• Brazil
• China
• Mexico
• Italy
• Turkey
• Spain
• US (relative to EU)
• Germany
Demographics will also affect consumption patterns, but only gradually
PricewaterhouseCoopers LLP
12 December 2008
Slide 13
Projected average growth of working age population: 2006-50
1.0%
India
Brazil
US
0.5%
% change per annum
UK
0.0%
Turkey
-0.5%
China
-1.0%
Germany
Russia
-1.5%
Source: UN
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12 December 2008
Slide 14
Key model results
GDP growth
Relative size of economies
GDP per capita levels
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12 December 2008
Slide 15
Projected trend growth rates in key economies
10.0%
China
9.0%
8.0%
% real GDP growth
7.0%
India
India
6.0%
China
Brazil
5.0%
Russia
Russia
Brazil
US
4.0%
Japan
3.0%
2.0%
US
Japan
1.0%
20
49
20
47
20
45
20
43
20
41
20
39
20
37
20
35
20
33
20
31
20
29
20
27
20
25
20
23
20
21
20
19
20
17
20
15
20
13
20
11
20
09
20
07
0.0%
Source: PwC projections of trend growth (excluding cyclical variations)
PricewaterhouseCoopers LLP
12 December 2008
Slide 16
Projected average real potential GDP growth: 2007-50
Japan
Germany
UK
US
Russia
Domestic currency
Mexico
Brazil
Turkey
Indonesia
China
India
0
2
4
6
8
% real GDP growth p.a.
PricewaterhouseCoopers LLP
12 December 2008
Slide 17
Projected average real GDP growth: 2007-50
Japan
Germany
UK
US
Russia
Domestic currency
US $ terms
Mexico
Brazil
Turkey
Indonesia
China
India
0
2
4
6
8
10
% real GDP growth p.a.
PricewaterhouseCoopers LLP
12 December 2008
Slide 18
Relative size of Big 4 economies: GDP at market exchange rates
Constant 2006 US $bn
60000
50000
40000
US
China
India
Japan
30000
20000
10000
0
08 011 014 017 020 023 026 029 032 035 038 041 044 047 050
0
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
PricewaterhouseCoopers LLP
12 December 2008
Slide 19
China and India dominate E7 economies (relative GDP at MERs)
Index: US = 100
140
120
100
2007
2025
2050
80
60
40
20
0
S
U
na
i
h
C
PricewaterhouseCoopers LLP
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In
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In
ia
s
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o
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12 December 2008
Slide 20
But other E7 economies could grow to significant size by 2050
•
Brazil could be bigger than Japan
• Russia and Mexico could be bigger than Germany or the UK
• Turkey could be of similar size to Italy
Average GDP per capita in E7 could by 2050 reach current
G7 levels (but still well below projected G7 levels in 2050)
PricewaterhouseCoopers LLP
12 December 2008
Slide 21
Potential GDP in 2050 in other fast-growing emerging economies
(relative to UK = 100 with Turkey as an additional comparator)
Bangladesh
Poland
Argentina
Malaysia
Pakistan
South Africa
Iran
Egypt
Thailand
Philippines
Saudi Arabia
Nigeria
Turkey
Turkey
Vietnam
0
10
20
30
40
50
60
70
80
Index (UK GDP in 2050 = 100)
PricewaterhouseCoopers LLP
12 December 2008
Slide 22
China and India have different comparative advantages
India has strengths in:
- IT skills and technologies
- low cost English speaking staff for offshoring services
- younger population
China has advantages in:
- low cost manufacturing
- higher average education levels
- higher savings and investment rates
Should create potential for mutually beneficial trade
But: also competing for natural resources to support growth
PricewaterhouseCoopers LLP
12 December 2008
Slide 23
What might derail growth in China and India?
Macroeconomic instability – knock-on effects of global crisis:
- China more vulnerable on exports
- India more vulnerable on capital flows
Energy, water and transport infrastructure constraints
Over-investment without proper capital allocation mechanisms (c.f. Japan in
1980s/1990s)
Protectionism in key export markets (US/EU)
Political instability (linked to rising economic inequality and social unrest)
Environmental crises
Other emerging economies likely to face similar challenges
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12 December 2008
Slide 24
Implications for business
Possible winners and losers over next 10 years
Longer term shift to a low carbon economy
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12 December 2008
Slide 25
Potential impact on European companies over next 10 years
Winners
Losers
Retailers
Mass market manufacturers (both low tech
and increasingly hi-tech)
Global brand owners
Business and financial services
Creative industries
Healthcare and education providers
Niche high value added manufacturers
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Financial services companies not able to
penetrate E7 markets who become
vulnerable at home to E7 entrants
Companies that over-commit to E7 without
right local partners and business
strategies
12 December 2008
Slide 26
Climate change challenge remains as severe as ever
Economic growth projections imply more than doubling of
primary energy consumption in ‘Business as Usual’ scenario
Index (2006 = 100)
450
400
350
300
250
GDP
Primary energy
200
150
100
50
0
2006
2020
2035
2050
Source: World Bank and BP data for 2006, PwC model estimates for later years
PricewaterhouseCoopers LLP
12 December 2008
Slide 27
Achieving Greener Growth – global carbon emissions need to be
cut to only around half current levels by 2050
GtC pa
25
Business as usual
20
Greener energy
mix
15
Faster energy
efficiency
improvements
10
5
Greener Growth
(with CCS)
0
2006
2025
Carbon capture
and storage
2050
Source: PwC model projections from July 2008 report
PricewaterhouseCoopers LLP
12 December 2008
Slide 28
Advanced economies (G7) need to lead the way in cutting carbon
emissions if emerging economies (E7) are later to follow
GtC pa
4.5
4
3.5
3
2.5
E7
2
1.5
1
G7
0.5
0
2006
2020
2035
2050
Source: PwC model projections for Greener Growth + CCS scenario
Note: E7 = China, India, Brazil, Russia, Mexico, Indonesia and Turkey; G7 = US, Japan, Germany, UK, France, Italy and Canada
PricewaterhouseCoopers LLP
12 December 2008
Slide 29
All major sectors need to undergo radical shift to a low carbon
economy by 2050 – big challenge, but also big opportunities
Gigatonnes of carbon (GtC)
25
20
c.75% reduction vs BAU
requiring action in all
sectors
15
10
Industry/other
Buildings
Transport
Power
5
0
BAU
Greener growth + CCS
Source: PwC model estimates for BAU and Greener Growth + CCS scenarios for 2050
PricewaterhouseCoopers LLP
12 December 2008
Slide 30
Summary
The global financial crisis will, if anything, accelerate the shift in the global
centre of gravity to the East:
- US, China and India to be three major economies by 2050
- China could overtake US as early as 2025
- India could grow faster, but China will remain much bigger
But: major public policy challenges for China and other emerging economies
to sustain recent strong growth trend
Potential ‘win-win’ for European economies if they can remain open, flexible
and focused on human capital – but there will be losers as well
Shift to a low carbon economy provides both huge challenges and huge
opportunities for European businesses
PricewaterhouseCoopers LLP
12 December 2008
Slide 31
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12 December 2008
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Slide 32