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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 PricewaterhouseCoopers LLP 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 PricewaterhouseCoopers LLP 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 + PricewaterhouseCoopers LLP ? 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 PricewaterhouseCoopers LLP 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 PricewaterhouseCoopers LLP 12 December 2008 Slide 14 Key model results GDP growth Relative size of economies GDP per capita levels PricewaterhouseCoopers LLP 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 ia d In zi a r B l ia s us R M co i ex d In ia s e n o ey k r u T 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 PricewaterhouseCoopers LLP 12 December 2008 Slide 24 Implications for business Possible winners and losers over next 10 years Longer term shift to a low carbon economy PricewaterhouseCoopers LLP 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 PricewaterhouseCoopers LLP 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 © 2008 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP (a limited liability partnership incorporated in England). PricewaterhouseCoopers LLP is a member firm of PricewaterhouseCoopers International Limited. No part of this presentation may be copied, redistributed or placed on any website without permission. This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this report without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this report, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this report or for any decision based on it. 12 December 2008 PricewaterhouseCoopers LLP Slide 32