The growing risks in many emerging market (EM) countries have been increasingly in focus over the past few months. Their vulnerability to changing global financial conditions has been exposed by higher bond yields and a strengthening US dollar. Higher oil prices and growing trade tensions also threaten additional headaches. This report try to assess the longer-term growth prospects by setting aside the near-term risks.
This is not the first time that a longer-term view has been attempted. Back in 2011 in The World in 2050, a framework was established for longer-term forecasting and ultimately used it to make GDP projections for 100 countries in 2050. Demographics, education, life expectancy, rule of law and other elements of underlying “economic infrastructure” were the main variables that featured in the model.
To the extent that the accuracy of a 40-year forecast can be assessed after a mere eight years, the forecasts generated from this model have proved reasonably accurate, at least in terms of the rankings of growth in a global context: the model correctly projected that the likes of China, India, Indonesia and the Philippines would outperform their emerging market peers and that developed market growth would remain much more subdued.
This ongoing outperformance by emerging economies means that they have accounted for more than half of the growth in the global economy since 2010, allowing global growth to remain remarkably stable in the post-crisis period. Indeed in 2017, the world registered the strongest year of growth since the immediate bounce-back following the global financial crisis. At 3.1 per cent it was weaker than in the decade preceding the great recession but the same as the average pace delivered since 1970 despite weaker demographic drivers in nearly all economies.
Population shape matters too, not just population growth…
It has already become apparent that the model itself had some weaknesses for making projections. For instance, by forecasting a per capita growth rate and then simply adding on working age population growth, it ignored the impact of demographic variables, like the shape of the population, on driving per capita growth too.
Young populations with higher growth in working-age population growth will have a greater share of the population that is of working-age over the next decade or so, helping to lift per capita growth rates, not just total growth rates. As these young people age, they should become more productive, particularly as education rates continue to rise across the emerging world.
Many of the large emerging market economies have a population whose median age is below 30 and so ageing could have a positive impact on growth potential in coming years. This is captured in the ‘share of population that is working-age’ variable in the model, and points to a greater share of the population being employed, paying taxes and consuming more. Taking the US as a guide, even with their higher household savings rates, the 35-64 age groups have the highest expenditure per person.
What will the global economy look like in 2030?
Firstly, these projections suggest that, irrespective of the numerous strains on many emerging economies, the fundamentals imply that EM-supported global growth of the past decade has further to run. The trend of the past five years, of just below 3 per cent global growth, looks like it could be sustainable, implying that by 2030, global GDP is about 40 per cent higher than in 2017.
On HSBC projections, both developed markets (DMs) and emerging markets (EMs) growth will be slower in the coming decade than they have been since the financial crisis but EM now comprises a larger share of the world. Over the past decade, EM accounted for about half of global growth and on HSBC modelled estimates, over the coming decade or so, roughly 70 per cent of global growth will be from countries currently describe as emerging. EM growth is projected to be 4.4 per cent in 2018-30 (compared with 4.7 per cent in 2010-17) and DM growth is seen at 1.5 per cent (down from 1.7 per cent).
Unsurprisingly, in 2008-17 the biggest single contribution to global growth came from China. On HSBC projections, China will continue to lead the charge over the next decade or so, but the other notable shift in the composition of global growth will come from the rest of emerging Asia. With five of our six most rapidly growing economies – Bangladesh, India, Pakistan, Philippines and Vietnam – all forming part of that region, by 2030 the contribution to global growth by emerging Asia ex China should be converging on that of the whole group of countries currently classified as developed by MSCI.
Like the EM aggregate, China and the rest of Asia may not be set to grow quite as quickly in the next decade as in the last, but the region now makes up a bigger share of the world so its contribution to global growth is as high. The most notable shift is set to be in India, with our projections suggesting it will go from the seventh largest economy in the world to the third by 2030. There is also continued room for catch-up going beyond 2030. Even in this world, and after doubling between 2007 and 2030, underlying GDP per capita is set to remain just a fraction of that in the west. On HSBC projections, the EM average will still be less than 15 per cent of the DM average and China will be below 30 per cent. For DM it is a mixed picture. In terms of absolute size, the large economy and stronger demographics in the US keeps it close to the top of the rankings while the sheer size of their economies means Germany and Japan stay in the top five, despite rapidly ageing populations.
The biggest risers up the rankings are all in Asia. But the small population, demographically challenged, rich economies in Europe slide down the rankings: Austria and Norway do not even make it into the top 30 by 2030 while Denmark slips below the top 40.
As for the global population, the shift to EM looks set to continue. India and China, by 2030, account for 35 per cent of the global population and by 2030, nearly 25 per cent of the world’s working age population will be in other Asian countries. However, the biggest regional mover will be Africa, where young, fast-growing populations
mean the continent will have more people aged between 16 and 64 than China by 2030.