The World in 2050 Does the global financial crisis change the long-term outlook? John Hawksworth...

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

PricewaterhouseCoopers LLP12 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


0

1

2

3

4

5

6

7

Source: World Bank up to 1997, IMF for 1998-2009 (using market exchange rates to aggregate world GDP)

Rea

l gro

wth

(%

)

Long-run average = 3.2%

World GDP growth has been above trend since 2004 …


0

1

2

3

4

5

6

7

Source: World Bank up to 1997, IMF for 1998-2007, PwC for 2008-9 (using market exchange rates to aggregate world GDP)

Rea

l gro

wth

(%

)

Long-run average = 3.2%

… but is now expected to move sharply below trend due to the global financial crisis

Forecast


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

G7 growth high

Creditboom

Housingbubbles

Interestrates low

Inflation down

Goods prices down

*E7 = largest seven emerging economies


Anatomy of a Crisis: Stage 2 – double hit from credit crunch and rising commodity prices (mid-2007 to mid-2008)

E7 growthstill high

G7 growth slowing

Creditcrunch

Housingbust

Interest ratedilemma

Inflation up

Commodityprices up

?

-

?

+

-


Anatomy of a Crisis: Stage 3 – banking crisis deepens while commodity prices fall back (September 2008 to date)

E7 growthfalls sharply

G7 move into recession

Bankingcrisis

House prices fall further

Interestrates down

Inflation down

Commodityprices down

?

-

-+/?

-+/?


Broad-based decline in global growth now expected

-2

0

2

4

6

8

10

China Russia Brazil US Euro area

Source: IMF, PwC

An

nu

al %

gro

wth

200720082009

Risks clearly weighted to the downside in the short term


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


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


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)


How big are the Chinese and Indian economies?

0

20

40

60

80

100

120

US Japan China India

GDP at marketexchange rates

GDP at purchasingpower parities (PPPs)

Index (US = 100)

Source: PwC estimates for 2007 using World Bank data for 2006


Age vs Youth

Fast ageing

• Russia

• Korea

• Japan

• China

• Italy

• Spain

• Germany

Younger for longer

• India

• Indonesia

• Brazil

• Mexico

• Turkey

• US (relative to EU)

Demographics will also affect consumption patterns, but only gradually


IndiaUS

UK

China

Brazil

Russia

Projected average growth of working age population: 2006-50

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

India

Turke

y

Brazil

Mex

ico US

Indo

nesia

Austra

lia

Canad

aUK

Franc

e

China

Germ

any

Spain

Italy

Japa

n

Korea

Russia

Source: UN

% c

han

ge

per

an

nu

m

Turkey

Germany


Key model results

GDP growth

Relative size of economies

GDP per capita levels


India

China

BrazilRussia

US

Japan

Projected trend growth rates in key economies

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Source: PwC projections of trend growth (excluding cyclical variations)

% re

al G

DP

grow

th

India

China

Brazil

Russia

US

Japan


Projected average real potential GDP growth: 2007-50

0 2 4 6 8

India

China

Indonesia

Turkey

Brazil

Mexico

Russia

US

UK

Germany

Japan

Domestic currency

% real GDP growth p.a.


Projected average real GDP growth: 2007-50

0 2 4 6 8 10

India

China

Indonesia

Turkey

Brazil

Mexico

Russia

US

UK

Germany

Japan

Domestic currency

US $ terms

% real GDP growth p.a.


Relative size of Big 4 economies: GDP at market exchange rates

0

10000

20000

30000

40000

50000

60000

US

China

India

Japan

Constant 2006 US $bn


China and India dominate E7 economies (relative GDP at MERs)

0

20

40

60

80

100

120

140

2007

2025

2050

Index: US = 100


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)


Potential GDP in 2050 in other fast-growing emerging economies(relative to UK = 100 with Turkey as an additional comparator)

0 10 20 30 40 50 60 70 80

Vietnam

Turkey

Nigeria

Saudi Arabia

Philippines

Thailand

Egypt

Iran

South Africa

Pakistan

Malaysia

Argentina

Poland

Bangladesh

Index (UK GDP in 2050 = 100)

Turkey


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


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


Implications for business

Possible winners and losers over next 10 years

Longer term shift to a low carbon economy


Potential impact on European companies over next 10 years

Winners

Retailers

Global brand owners

Business and financial services

Creative industries

Healthcare and education providers

Niche high value added manufacturers

Losers

Mass market manufacturers (both low tech and increasingly hi-tech)

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


Economic growth projections imply more than doubling of primary energy consumption in ‘Business as Usual’ scenario

0

50

100

150

200

250

300

350

400

450

2006 2020 2035 2050

GDP

Primary energy

Source: World Bank and BP data for 2006, PwC model estimates for later years

Index (2006 = 100)

Climate change challenge remains as severe as ever


Achieving Greener Growth – global carbon emissions need to be cut to only around half current levels by 2050

0

5

10

15

20

25

2006 2025 2050Source: PwC model projections from July 2008 report

GtC pa

Business as usual

Greener energymix

Faster energyefficiencyimprovements

Carbon captureand storageGreener Growth

(with CCS)


Advanced economies (G7) need to lead the way in cutting carbon emissions if emerging economies (E7) are later to follow

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

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

GtC pa

E7

G7


All major sectors need to undergo radical shift to a low carbon economy by 2050 – big challenge, but also big opportunities

0

5

10

15

20

25

BAU Greener growth + CCS

Industry/other

Buildings

Transport

Power

Source: PwC model estimates for BAU and Greener Growth + CCS scenarios for 2050

Gigatonnes of carbon (GtC)

c.75% reduction vs BAU requiring action in all sectors


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


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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.

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