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Global growth: what is potential and where is it going?
25 Feb 2016
Economics
Global growth: what is potential and
where is it going?
DBS Group Research
25 February 2016
• Markets have worked themselves into a tizzy over a perceived crisis in
global growth
• But growth today is running at or above potential in the US, Japan and
Europe, and nearly at potential in Asia
• A sharp fall in working age population growth has lowered potential
growth in the G3 and Asia and will continue to do so in coming years
• If you think Asia’s growth is slow today, get used to it. Structurally,
Asia-10 growth will slow every year for the next 40 years
• Much of the slowdown will owe to rising incomes. Growth slows when
things ‘go right’ as much as when they ‘go wrong’
• Even with a much slower growth rate, Asia will be ‘creating’ entire
Germanys once every 2.2 years by 2025
Markets have worked themselves into a tizzy over a perceived crisis in global growth.
Central banks too. The ECB and BoJ have cut interest rates below zero, territory
once thought to be no man’s land. Spend and spend again is the message; save and
it will cost you. Last week, the OECD urged them to go lower yet. Act “urgently”, it
pleaded, “growth had practically flatlined”. Most currently expect the ECB and BoJ
will heed the call. Indeed most think the OECD was preaching to the choir.
Everyone wants faster growth. But the fact is, we’re not likely to see it. We reckon global growth today is running at or a little above potential. And potential is
headed down, not up – growth will be slower two years hence and slower yet two
years after that. Why? Two reasons: Productivity and population growth – the two
Nomenclature
Economic areas referred to
in this report are defined as
follows:
China & US – potential GDP growth
Asia-10: CH, HK, TW, KR,
SG, MY, TH, ID, PH, IN
7
Asia-9: A10 less CH
6
Asia-8: A10 less IN, CH
Asean-5: TH, MY, ID, PH, SG
Asean-4: TH, MY, ID, PH
Asia Big3: CH, IN, ID
G4: US, EU4, JP, A10
G3: US, EU4. JP
EU4: GE, FR, IT, UK
% per year
China
US
5
4
3
2
EU3: GE, FR, IT
1
0
2015
2020
2025
2030
2035
2040
2045
2050
David Carbon • (65) 6878-9548 • [email protected]
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2016
Potential GDP growth – US, JP, EU-4 and Asia-10
% per year
7
6
5
4
Asia-10
3
G4
2
G3
1
0
2015
2020
2025
2030
2035
2040
2045
2050
determinants of economic growth – have slowed a lot in recent years and will continue to fall rapidly in the years ahead. Except for some short-term cyclical wiggles
and waggles, and even with some much needed but ultimately one-off corrections
to distorted policies, growth isn’t going to go back up. It isn’t even going to “flatline”. It’s going to go down. Structurally, growth today is as good as it gets.
If you think growth is
slow today, get used
to it. It’s only going
down from here
Let’s be clear: Slower growth isn’t necessarily a bad thing. Not in the ‘save the
planet’ sense but in ‘hard’ economic terms. If growth is slowing because population
growth is slowing, it’s a false concern. What we care about is growth per person
– my income, your wage – not GDP in the aggregate. A small family can be just as
rich, or richer, than a large one.
And if growth slows because productivity growth slows, that can be a good thing
too. It’s not as ironic as it sounds, at least for emerging market economies. When
developing economy incomes go up, productivity growth goes down. As discussed
below, it’s the biggest reason why high-income economies grow more slowly than
low-income ones. Thus, to the extent slower growth follows from higher incomes,
it’s good news, not bad.
The bottom line is this: Whether you like it or not, whether central banks try to
prevent it or not, and whether it happens for good reasons or bad, growth is going
to go down in the years ahead, not up. In the US, we reckon potential growth has
already fallen to 1.9% and will slide to 1.6% by 2025 before stabilizing (chart on
page 1). There, falling working-age population growth is the sole reason why. In
China, history suggests potential growth today is about 6.4%. Falling productivity
growth (/ higher incomes) and a rapid drop in working age population will lower
China’s structural growth rate to 5.5% by 2020 and to 4.9% by 2025. Looking for a
big ‘rebound’ in China? Don’t.
Overall in the Asia-10, we reckon potential growth will drop to 5.7% by 2020 (from
6.3% currently), and to 5.2% by 2025 (chart above). In the G3 (US, EU4 and JP)
growth will drop to 1.3% from 1.6%. In its protestations last week, the OECD said
that without action global growth might not pick up for several years. We reckon
that even with action, growth is going down before it goes up.
The nuts and bolts – population and productivity
When it comes to GDP and its growth, the arithmetic is simple and brutally inflexible. Since GDP is output-per-worker times the number of workers, GDP growth is
the sum of output-per-worker growth and labor force growth. Thus, if a (probably
developed) economy grows by 3% and population (or, more precisely, the labor
force) grows by 2%, output-per-worker – productivity – grew by 1%.
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In fast-growing Asia, the sums are the same but the relative contributions have historically been skewed dramatically the other way. A ‘young’ economy might grow
by 9% and its population by 2%, implying productivity growth of 7%. While in this
example productivity accounted for 7/9ths (77%) of GDP growth, historically it has
been even higher. On average, productivity growth has accounted for 80%-85% of
all economic growth in Asia since the end of WWII [1].
What matters is income, not GDP per se
More on this below. For now, the point remains: how fast an economy can grow
depends on how fast productivity can be raised and on how fast the population /
labor force grows. And while some might be surprised to learn that productivity
growth has delivered 85% of Asia’s GDP growth since WWII, the really eye-popping
changes in recent years have been related to population / demographics. So let’s
begin there.
Revenge of the demographic dividend
Most are aware that population growth has fallen palpably in most parts of the
world in recent years. They’re not surprised to see a chart like the one below from
the UN. According to the latest (2015) revision to its World Population Prospects
[2], China’s population growth fell to a mere 0.5% in 2015 from 1.25% in 1996 and
1.9% in 1990. US population growth is barely faster than China’s, having dropped
to 0.75% in 2015 from 1.25% in 2000. Especially notable is Japan, where population
growth fell below 0.5% in 1990, below zero in 2010 and is currently running at a
rate of negative 0.2% per year.
Global population growth
% per year
2.25
2.00
1.75
China
Asia-10
US
Japan
1.50
1.25
1.00
0.75
0.50
0.25
0.00
-0.25
-0.50
75
When developing
economy incomes
go up, growth goes
down. ‘Twas ever
thus
80
85
90
95
00
05
10
15
20
25
But falling population growth is only half the story. Populations are growing older
too. Back in 1975, the median age in China was 20; today it is nearly double that. In
the Asia-10 it has doubled – to 40 from 20 on the same time frame. In Hong Kong,
the median age today is 44, in Singapore and Korea it is 41 and in Japan it is 47. In
all 4 countries, it is 7-9 years higher than in 2000 (see Appendix I).
Plainly, older populations mean fewer workers are bringing home the bacon for
everyone else. Not only is there ‘less to go around’ but that typically means less is
saved and invested too. Less investment means less growth, end of story.
In the jargon, the ‘demographic dividend’ from expanding populations in decades
past is now running in reverse. The proportion of those of working age in the total
population is peaking in many countries as we speak – or indeed peaked a couple of
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years ago (charts below). This share will fall sharply in the coming years throughout
most of Asia, Japan, Europe and the US. Especially sharp declines are already being
seen in China, Korea, Hong Kong, Taiwan and Singapore and they will continue,
according to the UN, for another 25 years. Within Asia, only India and the Philippines will be spared, although Indonesia’s working age share should at least remain
stable for another decade (chart bottom left).
The ‘demographic
dividend’ of decades
past is now running
in reverse
The implications for potential growth are clear. If population growth is falling and
the population is getting older at the same time, it must mean that the growth in
working age population is falling even faster than the total. And it’s the latter that
matters to potential GDP growth because, well, it’s the working age guys and gals
who go to work everyday.
Working age population growth has indeed slowed far more dramatically than
population growth overall throughout most of Asia and the G3. For any given
country, whatever one used to think was a reasonable estimate of potential growth
probably has to be shaved a good deal lower. How much lower?
Asia – demographic dividend reverses
Asia – demographic dividend reverses
% share of working age population in total
% share of working age population in total
70
70
65
65
60
60
55
2016
55
50
2016
50
45
China
HK
40
Korea
Taiwan
35
50
60
70
80
90
00
10
20
30
40
Spore
45
50
Japan
40
Thailand
35
50
60
70
80
90
00
10
20
Asia – demographic dividends still rising
G3 – demographic dividend reverses
% share of working age population in total
% share of working age population in total
30
40
50
30
40
50
65
60
60
55
55
50
Philippines
45
50
India
Japan
Indonesia
40
US
45
EU-3
40
35
50
60
70
80
90
00
10
20
30
40
50
50
60
70
80
90
00
10
20
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In China, (chart below left), people talk about population growth heading towards
zero by 2025. Big deal. Working age population growth (WAPG) is practically zero
today and it will be negative 0.5% before you know it. Among other things, that
means every drop of GDP growth will have to come from productivity growth alone.
Working age population growth is falling
much faster than
population growth
overall
By 2020, 4 years from now, the first half-a-point of productivity growth will be spent
just making up for an outright drop in the working age population before GDP
grows at all. Productivity will probably – probably – come to the rescue. But by
2025, potential GDP growth will have fallen by another 1.5 percentage points and
half of that will have come from demographics alone. Higher incomes and falling
productivity growth will, with luck, have accounted for the other half.
What about Hong Kong? Here again, total population growth deceives. It appears
that growth in the latter of 0.6% growth would support potential GDP growth
for 10-15 more years (chart below right). But working age population growth is
already zero and headed to -1.25% by 2025. Hong Kong is a high income country,
which means it’s not easy to raise productivity. GDP growth of 2%-2.5% will be difficult to attain over the coming decade.
Singapore is almost in the same boat (chart bottom left). Total population growth
is falling fast but that of working age is falling much faster. WAP growth is still a
China – population growth
Hong Kong – population growth
% per year
% per year
3.50
4.80
3.00
2.50
Working age
4.20
Working age
Total
3.60
Total
3.00
2.00
2.40
1.50
1.80
1.00
1.20
0.50
0.60
0.00
0.00
-0.50
-0.60
-1.20
-1.00
75
80
85
90
95
00
05
10
15
20
25
75
30
80
85
90
95
00
Singapore – population growth
Korea – population growth
% per year
% per year
05
10
15
20
25
30
3.50
4.00
3.50
3.00
Working age
3.00
Working age
Total
2.50
Total
2.00
2.50
1.50
2.00
1.00
1.50
0.50
1.00
0.00
0.50
-0.50
0.00
-1.00
-1.50
-0.50
75
80
85
90
95
00
05
10
15
20
25
30
75
80
85
90
95
00
05
10
15
20
25
30
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Japan – population growth
US – population growth
% per year
% per year
1.20
1.80
Working age
0.80
Working age
1.60
Total
Total
1.40
1.20
0.40
1.00
0.00
0.80
0.60
-0.40
0.40
-0.80
0.20
0.00
-1.20
75
80
85
90
95
00
05
10
15
20
25
30
75
80
85
90
95
00
05
10
15
20
25
30
comparatively high 1.4% per year. But in 8 more years that will have fallen to zero
and thereafter, as in China, productivity gains will have to deliver every drop of GDP
growth the country hopes to enjoy. Korea’s WAPG (bottom right of previous page)
is still adding a half a point to GDP growth but by 2025 it will be subtracting a full
point from potential GDP growth every year.
Japan? Here everyone howls that population is already falling at a rate of 0.2%
per year. That’s but one-fifth of the real problem – the working age population is
dropping by 1% per year (chart above left).
Potential growth in
Japan today is about
0.5%. In the US, it is
1.9%
We’ll discuss this more below but consider the following for a moment. It’s normal
to think of productivity growth in a high-income country (like Japan or the US)
maxing out at about 1.5% per year. In fact, worryingly, it has been lower than that
throughout much the developed world for the past 20 years. But assume for the
sake of argument that Japan maintains productivity growth of 1.5% per year – a
WAPG of minus 1% then puts potential GDP growth at 0.5%.
As many will know, that is precisely what Japan’s economy grew by last year and
a good deal less than the 0.9% that consensus expects it to grow by in 2016. If
consensus is correct, Japan’s growth will run 40% above potential this year. Why
is everyone fretting over ‘slow growth’ in Japan? Why is the BoJ pushing interest
rates into negative territory when consensus expects 2016 growth to be 40% higher
than potential?
Finally, the US (chart above right). The (post-WWII) baby-boomers started reaching
retirement age 5-6 years ago and working age population growth is now falling
like a rock. Back in 2000, at the peak of the dotcom bubble, working age population growth was running at 1.3% and adding that much to potential GDP growth.
Today it’s growing / adding a full point less.
If one again takes 1.5% as a reasonable productivity target for an advanced country
like the US, today’s 0.4% WAPG means potential GDP growth in the US is only 1.9%.
Just like in Japan, consensus expects another year of ‘painfully slow’ growth in the
US. And just like in Japan, the US is already growing a little faster than potential.
Potential growth will slow further. By 2025, the UN reckons WAP growth in the US
will drop to 0.1%. If productivity can be held at 1.5%, potential will have slowed to
1.6% per year. If markets are in a tizzy today, where will they be nine years hence?
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Productivity
Falling WAP growth is putting a big dent into GDP growth throughout the world
and that will only deepen over the coming decade. In Asia, with luck, falling productivity growth will be an even bigger force driving slower GDP growth.
Growth falls when
things ‘go right’ as
much as when things
‘go wrong’
When developing economy incomes go up, productivity goes down. ‘Twas ever
thus. Why? At early stages of development, incomes and technological levels are
low compared to developed economies. The easiest way to raise productivity is to
borrow techniques, methods and capital equipment from countries that developed
them 10, 20 and 30 years earlier. Why re-invent the wheel when you can buy an
old one cheaply? Foreign techniques and equipment allow a developing economy
to raise output almost immediately and low wages mean the output can be readily
sold into global markets. Output and incomes jump sharply.
But to keep incomes growing, a developing economy has to raise the technology
bar again. Techniques, machinery and ideas developed 20 years ago are not as
cheap as those developed 30 years ago. You get less bang for the buck. Moreover, local wages are now higher so it’s tougher to break new ground (steal market
share) in global markets. For both reasons, the second jump in productivity and
wages is smaller than the first. The third less than the second, and so on.
Productivity and wage growth continue to slow as local incomes and education and
technological levels get closer and closer to those of the globally most advanced
countries. Ultimately, productivity growth has to come from raw research and development, and these gains come grudgingly and sporadically. In the post-war period, growth in output per person in the developed economies has averaged only
about 1.75% per year and more recently it has fallen well short of that [3].
Most of Asia remains far from the ‘technological edge’ of the developed world and
productivity growth is still 3-4 times higher than in developed countries. Nevertheless, as incomes and technological levels go up, productivity and GDP growth will go
down. It’s one of the prices of success.
The charts below show the income/productivity paths for some of Asia’s more successful development cases from the post-war period. Japan, Hong Kong, Singapore,
Taiwan and Korea can all be considered to have made the jump to developed country status and all have watched productivity growth fall as an integral part of the
process. Asia’s lower income countries will experience the same drops in productivity if they continue to grow successfully in the years ahead.
Singapore – income vs productivity growth
14
14
12
12
10
10
Per-capita GDP growth
Per-capita GDP growth
Japan – income vs productivity growth
8
6
4
2
0
-2
8
6
4
2
0
-2
-4
-4
-6
-6
0
20,000
40,000
60,000
GDP per person in constant 2014 USD
0
20,000
40,000
60,000
GDP per person in constant 2014 USD
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Global growth: what is potential and where is it going?
Taiwan – income vs productivity growth
14
14
12
12
10
10
Per-capita GDP growth
Per-capita GDP growth
Korea – income vs productivity growth
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8
6
4
2
0
8
6
4
2
0
-2
-2
-4
-4
0
10,000
20,000
0
30,000
GDP per person in constant 2014 USD
5,000 10,000 15,000 20,000 25,000
GDP per person in constant 2014 USD
If you combine all the Asian economies together into a single chart like the one
below, two key features of post-war development experience stand out. The first
is the falling productivity growth that accompanies rising incomes discussed above.
Second, there is very clearly a lot more volatility at the lower end of the income
scale [4]. This is a good illustration of what most emerging market investors have
long known to be true – high growth / low income countries are riskier bets. They
offer greater growth – hence greater returns – but the greater volatility means you
need a longer time horizon to invest safely there.
Investors often ask which Asian country they should invest in. Since even today the
Asia-10 countries span the entire income spectrum (and will for years to come; see
chart at top of next page), the answer depends entirely on your risk/reward profile. Are you looking for high growth-high risk? Aim left. Low growth-low risk?
Lean right. In Asia, there’s something for Junior, for Grandma and for everyone
in-between.
Potential GDP growth – marrying productivity and demographics
Come back to the productivity vs income chart below. If you use the black historical
trend line there as a guide, you can plot out a reasonable expectation for productivity growth for the Asia-10 countries as they (continue to) develop in the years
Asia-10 – income level and productivity growth
Growth in low
income countries is
more volatile than in
high income ones
Growth in real per-capita GDP
20
15
y = -0.0001x + 6.9565
10
5
0
-5
-10
0
10,000
20,000
30,000
40,000
50,000
60,000
Income (GDP per pers, constant 2014 USD)
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Asia – per capita GDP timeline
USD per person in 2014 and number of years required to reach Singapore pci (assuming 6% pci growth rate)
70,000
SG
63,486
60,000
HK
50,000
40,895
40,000
KR
TW
30,000
28,758
22,702
20,000
IN
PH
ID
1,677
2,643
3,501
10,000
TH
MY
CH
11,244
5,977 7,649
0
-64
-60
-56
-52
-48
-44
-40
-36
-32
-28
-24
-20
-16
-12
-8
-4
t=0
ahead. Add that to the UN’s projections for working age population growth and
you’ll get a pretty good estimate for total GDP growth for the Asia-10 countries
over the coming decade(s) [5] [6].
Asia’s incomes span
the entire spectrum
How ‘bad’ will Asia’s slowdown be? Pretty bad. Start with China, the country everyone worries the most about. At a per-capita income of US$8000 in 2015, the Asian
experience suggests China’s productivity growth should be about 6% per year. Add
to that a working age population growth of 0.4% and potential growth comes to
6.4% per year – a bit below China’s actual growth rate of 6.9% last year. Plainly,
Asia’s history suggests the fall in GDP growth in China to 7-odd percent from 10%
just a few years ago was long overdue.
But here’s the thing – if you’re fretting about China’s growth being slow today and
slowing further tomorrow, fret no longer – it’s virtually guaranteed. By 2020, one
should reasonably expect that growth there will have slowed to 5.5% and, by 2025,
to about 5%. As the chart below shows, about half the drop will follow from a
negative WAPG by 2019 and half will follow, naturally and necessarily, from rising
per-capita incomes.
China – structural GDP growth components
% per year
7
6
5
4
Prod'y growth
3
WAP growth
2
GDP growth
1
0
-1
15
20
25
30
35
40
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Asia-10 growth will follow a similar, though somewhat less steep, trajectory than
China’s because declines in WAPG and productivity growth will be less dramatic.
Not everywhere, however. In Korea, (chart below left) productivity growth has already slowed dramatically from the Tiger days of the 1960s, 70s and 80s. But WAP
growth there will drop very sharply over the next 4 years and will fall to nearly minus 1% by 2025. Potential GDP growth, currently about 4% per year, will drop to
2.8% and 1.5% by 2020 and 2025, respectively.
In Singapore (chart below right), per-capita GDP is already as high as in most developed economies and we assume, generously, that productivity growth won’t fall below the 1.5% long-run average rate that has prevailed in these countries [7]. Even
so, a sharp fall in WAP growth will likely lower Singapore’s potential GDP growth to
2% by 2020 and to 1.2% by 2025. Singapore is in the midst of an arduous ten-year
restructuring exercise aimed at lifting productivity growth. But it’s already high
income and falling WAP growth mean that if GDP growth is to stay above 2%, the
struggle is far from over.
India (bottom left) is the one country in Asia where demographics continue to favor
growth. It is also home to Asia’s lowest per-capita income, which means productiv-
Korea – structural GDP growth
Singapore – structural GDP growth
% per year
% per year
5
4
Prod'y growth
3.0
WAP growth
2.5
WAP growth
2.0
GDP growth
GDP growth
3
Prod'y growth
1.5
2
1.0
1
0.5
0
0.0
-1
-0.5
-2
-1.0
15
20
25
30
35
15
40
20
25
30
35
40
India – structural GDP growth
Asia-10 – structural GDP growth
% per year
% per year
9
7.0
Prod'y growth
8
6.0
WAP growth
7
5.0
6
GDP growth
4.0
5
3.0
Prod'y growth
4
3
2
WAP growth
2.0
Potential GDP
1.0
0.0
1
0
-1.0
15
20
25
30
35
40
15
20
25
30
35
40
45
50
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ity growth can stay high (techniques can be borrowed from abroad) for many years
to come (see chart at top of page 9). India’s potential GDP growth will fall by only
6-tenths of a percentage point over the coming decade. The bad news is, India is
still not performing up to the potential of its Asian peers. At an income level of
US$1775 per person in 2015, GDP should be growing closer to 8.5% per year than
the 7.4% it grew by in 2015 and the 7.8% we expect it to grow by this year.
Asia is underperfoming its potential. That’s a waste
that no low income
country can afford or
should accept
For the Asia-10 overall (bottom right of previous page), two points should be made.
First, as in India’s case, the region as a whole is underperforming its potential. Historical precedent suggests Asia-10 GDP should have grown by 6.3% in 2015 rather
than the 5.9% that it did. The region is running 6% below par. This is a waste that
low income countries cannot afford and should not accept.
But the converse is that Asia today is running at 94% of potential. While everyone
is fretting about a global growth crisis with a big focus on China, few seem to realize that Asia is running pretty close to potential and China may in fact be running a
little faster than that. Moreover, given Asia-10 per-capita income of $5700 and the
volatility in growth associated with such an income level discussed above, it’s not
clear that the 6% gap between potential and actual growth is anything but noise.
Second, sadly or gladly, 6% gap or no, potential growth in the Asia-10 is going nowhere but down over the coming years. If you think growth is slow today, get used
to it. Ten years hence, it will be a full point lower. (see Appendix II for remaining
country-specific charts.)
Global potential
The same summing of productivity and WAP growth may be undertaken in the G3
– the US, Japan and EU4 – except here we make the developed country assumption
that productivity growth can be maintained at the long-run average rate of 1.5%
per year [8]. Even with this, falling WAP growth in the US will take growth there
from 1.9% in 2016 to 1.6% by 2020, where it will stay until 2025 (chart below left).
Think Japan’s 2015 growth of 0.5% was slow? Maybe it was. But it was smack on
potential, thanks to negative WAP growth of 1%. The good news here is that Japan’s working age population won’t fall so rapidly over the coming decade (but it
will still decline). Potential GDP growth will edge back up towards 0.8% by 2025.
Alas, thereafter it heads straight back to no-man’s land (chart below right).
Potential in Europe? We reckon it is 1.6% in the EU4 (GE, FR, IT and the UK), precisely what consensus expects growth there to be this year [9]. Once again, worries
about a growth crisis don’t seem to jive with what should be expected.
US – structural GDP growth
Japan – structural GDP growth
% per year
% per year
2.0
1.5
Productivity growth
1.0
1.5
GDP growth
0.5
1.0
0.0
Prod'y growth
WAP growth
0.5
-0.5
GDP growth
WAP growth
-1.0
-1.5
0.0
15
20
25
30
35
40
15
20
25
30
35
40
11
Global growth: what is potential and where is it going?
25 Feb 2016
Slow is the new fast
Growth in the G3 is
better than last year
and the year before
that. Moreover,
it’s running 14%
faster than potential.
Where’s the crisis?
Markets have worked themselves into a tizzy over slow global growth. In the US,
consensus expects a mere 2.1% growth this year. But not only is that absolutely
unchanged from the past five years, it looks to be 11% faster than potential (table
below). In Japan, consensus expects 0.9% GDP growth this year. That’s better than
last year. And the year before that. And fully one-third faster than what can be
sustained over the longer-haul. Crisis?
In Europe – GDP is expected to grow by 1.6% this year. Again, that’s better than last
year and the year before that. And it’s smack on potential. No crisis here either.
Growth in Asia in running 6% below par. That’s not good but it’s not crisis. And it
could just be noise.
The bottom line is, there does not appear to be a ‘growth crisis’ anywhere in the G3
or G4. Thanks to falling growth in working age populations – and to steadily rising
incomes in Asia – slow is the new fast. The G3 – US, JP, EU4 – is running better than
1 and 2 years ago and 14% faster than potential. The G4 is running 7% faster than
potential. If you’re waiting for something faster than that, don’t. This is as good
as it gets.
G4 – potential growth and 2016 forecasts
USA
Japan
EU-4
Asia-10
Productivity
Growth
Working
Age
Pop'n
Growth
Potential
GDP
Growth
Consensus
forecast
Fcast /
potential
%
%
%
%
Ratio
%
%
1.5
1.5
1.7
5.3
0.4
-1.0
-0.1
1.0
1.9
0.5
1.6
6.3
2.1
0.9
1.6
5.9
1.11
1.68
0.99
0.94
51
14
35
0
34
9
23
33
1.6
3.2
1.8
3.1
1.14
1.07
G3
G4
Wt in
Wt in
G3 GDP G4 GDP
Note: G3 = US, JP, EU-4
G4= G3 + Asia-10
How many Germanys?
The message should be clear. Growth may be slow but it only goes down from here.
It will fall especially rapidly in the Asia-10 because incomes are rising briskly and because working age population growth is falling especially quickly. Does this mean
Asia is no longer the place to invest?
Not in the slightest. Asia is still growing 4 times faster than the G3 and even 25
years from now it will still be growing twice as fast. When you think about the
dollar value of that gap, added up year after year, it’s a massive amount of money.
To illustrate just how significant it is, we often talk about how Asia’s growth
amounts to creating an entire Germany, right here in Asia, every 3-4 years. Last year
for example, Asia-10 GDP grew by more than a trillion US dollars. With Germany
GDP equal to $3.3trn, it thus takes Asia 3.1 years to add a Germany to the world’s
economic map.
12
Global growth: what is potential and where is it going?
25 Feb 2016
Potential GDP growth – US, JP, EU-4 and Asia-10
% per year
7
6
5
4
Asia-10: 3.9%
3
China: 2.9%
2
G3: 1.6%
1
Even with slower and
slower growth, the
time it takes for Asia
to create a Germany
will grow shorter and
shorter, not longer
and longer.
0
2015
2020
2025
2030
2035
2040
What is especially eye-opening is the fact that, even with considerably slower
growth in the years ahead, the time it takes for Asia to put a Germany on the map
will grow shorter and shorter, not longer and longer. By 2020, Asia’s growth will
Is Asia slowing down
or speeding up?
Asia-10 – potential growth rate and years required to create a Germany
percent growth rate and years required
7.00
Potential growth (%)
6.00
Yrs required to create a Germany
5.00
4.00
3.9%
3.00
2.00
1.5 yrs
1.00
2015
2020
2025
2030
2035
2040
have slowed to 5.3%. But it will be creating a Germany every 2.6 years. By 2025,
growth will have slowed further but it will take only 2.2 years to create a Germany.
By 2040, growth will be down to 3.9% per year. And Asia will be putting a Germany
on the map every year and a half.
Is Asia really slowing down? Or is it, in some truer sense, speeding up? It’s a fair
question to ask.
13
Global growth: what is potential and where is it going?
25 Feb 2016
Notes:
[1]
Asia-10 – share of GDP growth due to productivity growth
per cap GDP growth as % of total GDP growth
100
90
80
70
60
50
40
30
20
10
0
64
69
74
79
84
89
94
99
04
09
14
[2]http://esa.un.org/unpd/wpp/
[3]
Advanced country productivity growth
per-capita GDP growth, % per year
Avg growth 1970-2014*
Avg growth 1990-pres
GE
FR
IT
UK
US
JP
G3
EU-4
1.88
1.47
1.64
1.01
1.42
0.34
1.93
1.52
1.72
1.37
1.79
0.98
1.74
1.25
1.75
1.15
* 1980-present for Japan, which had a relatively much lower income level until then
and was importing a lot of productivity growth from the West
[4] Indeed there is so much volatility at very low incomes that the chart excludes incomes below $2000 per person (in constant 2014 USD).
[5] One should not ascribe much precision to the trendline. The wide dispersion of
productivity growth seen in this chart, and especially in the individual country charts
just above it, illustrate a key problem with productivity and its measurement. True
productivity growth does not jump around like it appears in these charts. Measured
productivity growth does, however, and this is a big problem for analysts and policymakers.
Conceptually, productivity is purely a technical, supply-side concept – it has nothing
to do, or at least nothing directly to do, with demand. It gauges how many widgets
can you make for a dollar or many words per minute you may type. These kinds of
figures do not jump around much on a year-to-year basis.
But measured productivity can jump wildly, thanks to demand. At the macro or
sectoral level, productivity is measured by the taking the ratio of GDP (or sectoral
output) to manhours of work. John might be able to weld 25% more steel beams
this year than he could last year but if demand for steel beams is down, he might
not weld any. And measured productivity in the construction industry would look
awful even though in truth it had risen by 25%. Thus, demand can make an utter
14
Global growth: what is potential and where is it going?
25 Feb 2016
mess of a purely supply-side concept as the wide dispersion of data points in the
charts above shows.
The bottom line is it takes 10-20 years to see where true productivity has gone. Anyone pretending to claim that productivity growth rose or fell to 2.6% this year from
2.2% or 2.8% last year is doing just that: pretending. At a national / macro level, It
is virtually impossible to know what true productivity growth is doing in the shortrun. All one can do is look at the trend lines in the charts such as those above and,
10-15 years after the fact, say ‘things went okay’ or ‘back to the drawing board’.
[6] The wide dispersion in the productivity growth vs income charts also means there is
lots of room for individual countries to out- or under-perform the trend. The Asian
Tigers – SG, HK, KR, TW – have historically outperformed and a China, say, could too
over the coming decade(s) for many reasons. Alas, no country that has succeeded
in raising its income levels over time has been able to prevent a downward sloping
path in productivity growth over the same period.
[7] Ibid. [3].
[8] Ibid, [3].
[9] Consensus currently expects full year GDP growth of 1.7%, 1.3%, 1.2% and 2.1%,
respectively, in Germany, France, Italy and the UK.
Sources:
Population data are from the UN and the US Census Bureau. Other data are from
CEIC Data, Bloomberg and DBS Group Research (forecasts and transformations).
15
Global growth: what is potential and where is it going?
25 Feb 2016
Appendix I: median age and share of working age population in total population
China – median age and share of working age pop
HK– median age and share of working age pop
age in years
age in years
% of total
45
70
Working age
pop as % of
total (RHS)
40
65
60
30
55
25
50
70
55
50
45
35
% of total
Working age
pop as % of
total (RHS)
65
40
60
35
55
30
25
Median age (LHS)
20
45
15
40
50
Median age (LHS)
20
45
15
75 80 85 90 95 00 05 10 15 20 25 30
75 80 85 90 95 00 05 10 15 20 25 30
Korea – median age and share of working age pop
Spore – median age and share of working age pop
age in years
age in years
50
45
% of total
Working age
pop as % of
total (RHS)
40
70
50
65
45
60
35
% of total
70
Working age pop as
% of total (RHS)
65
40
35
60
30
55
55
30
50
25
Median age (LHS)
20
15
25
45
20
40
15
75 80 85 90 95 00 05 10 15 20 25 30
Median age (LHS)
50
45
75 80 85 90 95 00 05 10 15 20 25 30
Thai – median age and share of working age pop
Indon – median age and share of working age pop
age in years
age in years
% of total
50
45
40
35
70
Working
age pop as
% of total
(RHS)
65
60
55
30
50
25
20
Median age (LHS)
15
45
40
75 80 85 90 95 00 05 10 15 20 25 30
% of total
34
65
32
30
28
26
Working
age pop as
% of total
(RHS)
24
55
50
22
20
18
60
Median age (LHS)
45
40
16
75 80 85 90 95 00 05 10 15 20 25 30
16
Global growth: what is potential and where is it going?
25 Feb 2016
Appendix I (cont’d): median age and share of working age population in total population
Phils – median age and share of working age pop
India – median age and share of working age pop
age in years
age in years
% of total
30
28
26
24
Working
age pop as
% of total
(RHS)
58
32
56
30
54
28
52
50
48
22
46
20
44
Median age (LHS)
18
16
26
% of total
65
Working
age pop as
% of total
(RHS)
60
55
24
50
22
20
42
18
40
16
45
Median age (LHS)
40
75 80 85 90 95 00 05 10 15 20 25 30
75 80 85 90 95 00 05 10 15 20 25 30
US – median age and share of working age pop
Japan – median age and share of working age pop
age in years
age in years
% of total
42
40
Working age pop as
% of total (RHS)
65
53
60
48
38
36
55
43
34
50
38
45
33
40
28
% of total
64
62
60
Working age pop as
% of total (RHS)
58
56
54
32
Median age (LHS)
30
28
Median age (LHS)
52
50
75 80 85 90 95 00 05 10 15 20 25 30
75 80 85 90 95 00 05 10 15 20 25 30
Asia10 – median age and share of working age pop
EU3 – median age and share of working age pop
age in years
age in years
% of total
65
43
% of total
50
62
48
38
Working age pop as
% of total (RHS)
60
33
55
28
50
60
46
44
42
Working age pop as
% of total (RHS)
56
40
38
23
Median age (LHS)
45
40
18
75 80 85 90 95 00 05 10 15 20 25 30
54
36
34
58
Median age (LHS)
32
52
50
75 80 85 90 95 00 05 10 15 20 25 30
17
Global growth: what is potential and where is it going?
25 Feb 2016
Appendix I (cont’d): median age and share of working age population in total population
GE – median age and share of working age pop
FR – median age and share of working age pop
age in years
age in years
% of total
50
64
50
48
62
48
46
Working age
pop as % of
total (RHS)
44
60
40
56
40
38
54
38
36
34
52
Median age (LHS)
32
30
58
Working age
pop as % of
total (RHS)
44
42
42
60
46
58
% of total
56
54
52
36
34
50
32
48
30
50
Median age (LHS)
48
75 80 85 90 95 00 05 10 15 20 25 30
75 80 85 90 95 00 05 10 15 20 25 30
IT – median age and share of working age pop
UK – median age and share of working age pop
age in years
age in years
% of total
52
50
48
46
44
42
Working age
pop as % of
total (RHS)
40
38
36
34
32
Median age (LHS)
30
75 80 85 90 95 00 05 10 15 20 25 30
64
44
62
42
60
40
58
38
56
36
54
34
52
32
50
30
% of total
Working age
pop as % of
total (RHS)
60
59
58
57
56
55
54
Median age (LHS)
53
52
75 80 85 90 95 00 05 10 15 20 25 30
18
Global growth: what is potential and where is it going?
25 Feb 2016
Appendix II: structual GDP growth determinants
HK – structural GDP growth
Taiwan – structural GDP growth
% per year
% per year
Prod;y growth
3
WAP growth
GDP growth
2
5
Prod'y growth
4
WAP growth
GDP growth
3
1
2
1
0
0
-1
-1
-2
14
18
22
26
30
34
38
42
46
50
-2
15
20
25
30
Malaysia – structural GDP growth
Thailand – structural GDP growth
% per year
% per year
35
40
8
Prod'y growth
8
Prod'y growth
7
WAP growth
7
WAP growth
6
GDP growth
6
GDP growth
5
5
4
4
3
3
2
2
1
1
0
0
-1
-2
-1
15
20
25
30
35
15
40
Indonesia – structural GDP growth
20
25
30
35
40
Philippines – structural GDP growth
% per year
% per year
9
Prod'y growth
8
WAP growth
7
GDP growth
9
8
7
6
6
5
5
4
4
3
3
2
2
1
1
0
Prod'y growth
WAP growth
GDP growth
0
15
20
25
30
35
40
15
20
25
30
35
40
19
Global growth: what is potential and where is it going?
25 Feb 2016
Appendix II (cont’d): structual GDP growth determinants
India – structural GDP growth
EU4– structural GDP growth
% per year
% per year
9
2.0
Productivity growth
8
1.5
7
6
1.0
5
WAP growth
3
0.0
GDP growth
2
GDP growth
0.5
Prod'y growth
4
-0.5
1
0
15
20
25
30
35
40
WAP growth
-1.0
15
20
25
30
35
40
20
Global growth: what is potential and where is it going?
25 Feb 2016
GDP & inflation forecasts
GDP growth, % YoY
CPI inflation, % YoY
2012
2013
2014
2015
2016f
2012
2013
2014
2015
2016f
US
Japan
Eurozone
2.2
1.7
-0.7
1.5
1.4
-0.4
2.4
0.0
0.9
2.4
0.5
1.4
2.1
0.7
1.4
2.1
0.0
2.5
1.5
0.4
1.3
1.6
2.7
0.4
0.2
0.8
0.0
1.3
0.3
0.8
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
6.0
5.6
6.7
3.4
7.3
5.0
5.6
4.7
7.1
4.4
2.8
5.4
5.0
6.0
6.1
2.9
0.8
6.0
4.8
4.8
5.8
1.8
2.8
6.7
5.2
4.5
6.1
2.1
3.4
6.7
4.0
1.7
3.2
4.6
3.0
9.3
6.4
2.1
2.9
2.4
2.2
6.6
6.4
3.1
4.2
1.0
1.9
4.1
6.4
2.1
1.4
-0.5
-0.9
0.6
5.7
2.8
2.5
0.5
1.5
1.8
China
Hong Kong
Taiwan
Korea
7.7
1.7
2.1
2.3
7.7
2.9
2.2
2.9
7.3
2.3
3.9
3.3
6.9
2.4
0.8
2.6
6.5
2.4
1.8
3.0
2.6
4.1
1.9
2.2
2.6
4.3
0.8
1.3
2.0
4.4
1.2
1.3
1.5
3.0
-0.3
0.7
1.5
3.0
0.6
1.3
India*
5.6
6.6
7.2
7.4
7.8
7.4
9.5
6.0
5.0
5.4
* India data & forecasts refer to fiscal years beginning April; prior to 2013.
Source: CEIC and DBS Research
Policy & exchange rate forecasts
Policy interest rates, eop
Exchange rates, eop
current
1Q16
2Q16
3Q16
4Q16
current
1Q16
2Q16
3Q16
4Q16
US
Japan
Eurozone
0.50
0.10
0.05
0.50
0.10
0.05
0.75
0.10
0.05
1.00
0.10
0.05
1.25
0.10
0.05
…
112.3
1.102
…
112
1.14
…
113
1.13
…
114
1.12
…
114
1.12
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam^
7.00
3.25
4.00
n.a.
1.50
6.50
7.00
3.25
4.00
n.a.
1.50
6.50
7.00
3.25
4.00
n.a.
1.50
6.50
7.00
3.25
4.25
n.a.
1.50
6.50
7.00
3.25
4.25
n.a.
1.50
6.50
13,422
4.21
47.6
1.40
35.7
22,325
13,433
4.18
47.5
1.40
35.7
22,287
13,612
4.32
48.0
1.42
36.2
22,389
13,793
4.45
48.4
1.44
36.6
22,492
13,703
4.39
48.2
1.43
36.4
22,441
China*
Hong Kong
Taiwan
Korea
4.35
n.a.
1.63
1.50
3.85
n.a.
1.50
1.50
3.85
n.a.
1.50
1.50
3.85
n.a.
1.50
1.50
3.85
n.a.
1.50
1.50
6.53
7.77
33.2
1,236
6.61
7.79
33.0
1,193
6.65
7.79
33.4
1,212
6.68
7.79
33.8
1,232
6.66
7.79
33.6
1,222
India
6.75
6.75
6.50
6.50
6.50
68.6
67.5
68.6
69.6
69.1
^ prime rate; * 1-yr lending rate
Market prices
Policy rate
Current
(%)
US
Japan
Eurozone
10Y bond yield
Current
1wk chg
(%)
(bps)
FX
Current
1wk chg
(%)
Index
Equities
Current
1wk chg
(%)
0.50
0.10
0.05
1.75
-0.05
0.15
-7
-10
-12
97.5
112.3
1.102
0.7
0.8
-0.8
S&P 500
Topix
Eurostoxx
1,930
1,285
2,683
0.2
0.2
-3.2
Indonesia
Malaysia
Philippines
Singapore
Thailand
7.00
3.25
4.00
Ccy policy
1.50
8.28
3.95
3.83
2.19
2.04
21
4
-8
-4
-2
13418
4.21
47.6
1.402
35.7
0.7
0.2
0.1
0.1
-0.2
JCI
KLCI
PCI
FSSTI
SET
4,658
1,664
6,769
2,620
1,332
-2.3
0.0
0.2
0.2
3.3
China
Hong Kong
Taiwan
Korea
4.35
Ccy policy
1.63
1.50
…
1.37
0.86
1.82
…
-8
0
3
6.53
7.77
33.2
1236
-0.1
0.2
0.4
-0.7
S'hai Comp
HSI
TWSE
Kospi
2,929
19,192
8,283
1,913
2.1
1.4
0.8
1.5
6.75
7.83
9
68.6
-0.3
Sensex
23,089
-1.3
India
Source: Bloomberg
21
Global growth: what is potential and where is it going?
25 Feb 2016
Recent Research
ID: BI easing bias persists
19 Feb 16
EZ: will more QE help?
4 Nov 15
EZ: negative rates not a cure
17 Feb 16
Rates: regional rates rundown
2 Nov 15
US: how strong is consumption?
12 Feb 16
FX: monetary policy divergences intact
2 Nov 15
SG: the next growth driver
4 Feb 16
Rates: UST Curve - the next flattening leg
30 Oct 15
JP: BOJ into uncharted territory
2 Feb 16
JP: deciphering the BOJ
23 Oct 15
CNH: will capital controls help?
FX: Not just about CNY
2 Feb 16
ID: no room to cut
12 Oct 15
1 Feb 16
IN: the lowdown in exports
9 Oct 15
IN: RBI to await budget cues
1 Feb 16
SG: technical recession
6 Oct 15
Rates: Global rates roundup/ chart-pack
29 Jan 16
SGD: a lower policy band
6 Oct 15
CN: when is a trillion not a trillion?
29 Jan 16
CN: resolving the known unknowns
5 Oct 15
IN: fading boost from low oil prices
28 Jan 16
G4: who’s winning the currency wars?
25 Sep 15
TH: consumption the weak link
25 Jan 16
IN: RBI – another window opens
22 Sep 15
CN: how to end the vicious cycle
21 Jan 16
Japan’s “go global” experience (3)
21 Sep 15
Global crude: still spilling onto the floor
20 Jan 16
SG: mandate for inclusive policy
17 Sep 15
TW: after the election
19 Jan 16
IN: RBI – another window opens 22 Sep 15
IN: back at fiscal crossroads
19 Jan 16
Japan’s ‘go global’ experience (3) 21 Sep 15
CNH: “Taken” – the RMB episode
15 Jan 16
SG: mandate for inclusive policy
17 Sep 15
Rates: UST curve: belly’s too big
15 Jan 16
Qtrly: Economics-Markets-Strategy
10 Sep 15
CN: services and manufacturing are codependent
14 Jan 16
Triangulating Asian Angst: the US, China
and the 97 question
IN: prepared, not immune
16 Dec 15
CN: the need for institutional reform
21 Aug 15
Qtrly: Economics-Markets-Strategy 1Q16
10 Dec 15
SG: when China devalues
20 Aug 15
7 Sep 15
Holiday Heresies 2016
7 Dec 15
TW: the impact the yuan devaluation
19 Aug 15
ID: manufacturing still a drag
3 Dec 15
SG: saving manufacturing
17 Aug 15
CNH: billion dollar baby
16 Nov 15
IN: inflation remains key
6 Aug 15
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The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be
reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or
correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein
does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The
information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement
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