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
Slide 2PricewaterhouseCoopers 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
Slide 3PricewaterhouseCoopers LLP12 December 2008
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 …
Slide 4PricewaterhouseCoopers LLP12 December 2008
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
Slide 5PricewaterhouseCoopers LLP12 December 2008
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
Slide 6PricewaterhouseCoopers LLP12 December 2008
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
?
-
?
+
-
Slide 7PricewaterhouseCoopers LLP12 December 2008
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
?
-
-+/?
-+/?
Slide 8PricewaterhouseCoopers LLP12 December 2008
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
Slide 9PricewaterhouseCoopers LLP12 December 2008
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
Slide 10PricewaterhouseCoopers LLP12 December 2008
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
Slide 11PricewaterhouseCoopers LLP12 December 2008
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)
Slide 12PricewaterhouseCoopers LLP12 December 2008
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
Slide 13PricewaterhouseCoopers LLP12 December 2008
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
Slide 14PricewaterhouseCoopers LLP12 December 2008
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
Slide 15PricewaterhouseCoopers LLP12 December 2008
Key model results
GDP growth
Relative size of economies
GDP per capita levels
Slide 16PricewaterhouseCoopers LLP12 December 2008
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
Slide 17PricewaterhouseCoopers LLP12 December 2008
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.
Slide 18PricewaterhouseCoopers LLP12 December 2008
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.
Slide 19PricewaterhouseCoopers LLP12 December 2008
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
Slide 20PricewaterhouseCoopers LLP12 December 2008
China and India dominate E7 economies (relative GDP at MERs)
0
20
40
60
80
100
120
140
2007
2025
2050
Index: US = 100
Slide 21PricewaterhouseCoopers LLP12 December 2008
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)
Slide 22PricewaterhouseCoopers LLP12 December 2008
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
Slide 23PricewaterhouseCoopers LLP12 December 2008
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
Slide 24PricewaterhouseCoopers LLP12 December 2008
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
Slide 25PricewaterhouseCoopers LLP12 December 2008
Implications for business
Possible winners and losers over next 10 years
Longer term shift to a low carbon economy
Slide 26PricewaterhouseCoopers LLP12 December 2008
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
Slide 27PricewaterhouseCoopers LLP12 December 2008
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
Slide 28PricewaterhouseCoopers LLP12 December 2008
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)
Slide 29PricewaterhouseCoopers LLP12 December 2008
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
Slide 30PricewaterhouseCoopers LLP12 December 2008
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
Slide 31PricewaterhouseCoopers LLP12 December 2008
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
Slide 32PricewaterhouseCoopers LLP12 December 2008
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