Paul Diggle

Hello and welcome to Macro Bytes, the economics and politics podcast from abrdn. My name is Paul Diggle, Chief Economist here at abrdn.

Luke Bartholomew

And my name is Luke Bartholomew, Senior Economist at abrdn.

Paul Diggle

And today we are talking about long-run global economic growth with our colleague Robert Gilhooly – Bob – who has a forthcoming report on how the rise and fall of populations will drive the global economic rankings out to 2050. And indeed another on the long-term outlook for growth in emerging Asia specifically, which is going to be the linchpin of global growth over the next several decades. Bob, great to have you on the pod.

Bob Gilhooly

Thanks, Paul.

Paul Diggle

So let's start then with some of the high level highlights of your work. As things stand today, global trend growth is about two and a half percent a year, depending on exactly how you measure it. The US China and the eurozone are the biggest economies by GDP in the world. How do these standings change by 2050?

Bob Gilhooly

Thanks. The overarching picture is one of slowing global growth. We think it's likely to fade from that annual growth rate of around 2.5% to about 1.5% over the next quarter century. Emerging markets, overall, might be the engine of global growth, but it's really Asia that appears to have the brightest prospects within this. Indeed, China and developing Asia might account for around about 60% of global growth by 2050, up from a bit less than 50%, before the pandemic struck, and the whole of Asia could maybe be a bit over 45% of the global economy – about at least 10 percentage points higher than today. We could probably argue the most relevant metric for markets and also geopolitical power is kind of real dollar value of GDP rather than purchasing power parity, which is what these numbers are all based on. And using this, our forecasts show that India is likely to displace Japan to be the fourth largest economy in the world around 2032. China should then overtake the US a year or two after that, maybe a bit before 2035, while Indonesia will make it into the top seven in the global economy rankings around about 2045. But there's also a few notable mentions: the Philippines, Pakistan, Bangladesh and Vietnam, all likely to make very significant progress up the ranks in the global economy, with the latter three all breaking into the top 25 global economies for the first time. Giving this a kind of ranking, there are at least going to be some losers here. Countries falling down the ranks include Taiwan – now that's largely just a function of it being relatively small and fairly developed already. It's really the major oil exporters such as Russia, Saudi Arabia and Norway that kind of standout – this kind of fall from grace. I don't think Russia is likely to be a surprise to anyone here. But it's notable how bad the productivity performance of large hydrocarbon exporters has been since the global financial crisis. I mean, their productivity just hasn't been weak, it's actually been contracting, in an absolute sense. I think we could probably argue that all of them then face maybe some additional downside risks from the global effort to reduce dependence on oil and transition to a slightly greener economy.

Luke Bartholomew

So, one of the clichés that's often trotted out when people talk about long-term growth, Bob, is this phrase that ‘demographics is destiny’ – the idea that population growth, the size of populations and patterns within populations will be, in some sense, determinant of growth levels. But of course, we as economists would tend to come at the determinants of growth with a slightly broader perspective – this idea of a production function, which, of course, does have population in or at least a labour force in and the degree of human capital that that labour force might have developed…but the capital stock and then the efficiency with which those human and capital inputs are brought together. So, with that sort of broader sense of what determines growth in mind, are there any stories you can tell us in terms of how productivity or changes in labour force participation might be pushing back against some of the demographic patterns that would otherwise, by some people, be seen as destiny?

Bob Gilhooly

Yeah, sure. First of all, I think it might be just worth noting quickly that there are quite wildly different demographic backdrops facing different countries. India and Indonesia – we expect to see their populations expand by about 250 and 40 million, respectively, by 2050. In the same time period, China might have shrunk by about 113 million. By the end of this century, China's population might have fallen by about 650 million people. So that's getting pretty close to kind of losing the equivalent of both the US and eurozone put together in terms of people. So, it does sound quite important when it's framed like that, doesn't it? But I think you're right in the way you've set it up there; the ageing pressures, in terms of when we think about growth forecasts, can often be exaggerated, particularly when we're thinking of a sort of 20-25-year time horizon. So, if we consider dependency ratios, which typically define this kind of “working age group”, so those between 16 to 64 versus the rest of the population, given ageing populations in most countries, unsurprisingly, these kind of dependency ratios are moving adversely. But it's also the case that distribution of workers has been becoming older, too; in younger age groups, employment rates have been falling as higher education has become more of the norm. And that's true in both developed markets and emerging markets – that’s been pushing down participation rates for those younger age groups. At the same time, rising life expectancy is making working lives longer, boosting employment and participation of these older age groups. So, if instead we looked at dependency ratio in terms of workers rather than those of working age, we actually find that these are set to improve in several countries, rather than worsen – and particularly India, Indonesia, and Malaysia really stand out on that front, again, a kind of misleading steer by looking at those high-level demographic indicators. But, more generally, I think this shift in the workforce, to be comprised of older workers, often means the workforce projections that underpin these production functions are not as adverse as you might be worried about. Even in countries such as China and Thailand, which face unambiguous demographic challenges, we can still find some offset there – particularly human capital still has room to grow. For many emerging markets, we think we should be able to expect continued gains in both education skills and the returns to education and skills, crucially. And that will do a lot, I think, to offset a shrinking workforce. So, to put it simply, I think quality matters just as much as quantity within the labour market, when we're thinking about long-run growth.

Paul Diggle

Another way, Bob, the demographic picture is made more complicated in terms of how it ultimately impacts growth, is by changes in migration patterns, which can offset – in some cases – demographic ageing. So, to what extent is that a boon or a drag on different parts of the global economy?

Bob Gilhooly

To a large extent, migration is basically a kind of zero-sum game when we're thinking about populations and country growth. Open-border countries, such as those within the European Union, where you have that obviously legal right to move – I think there the kind of potential for migration flows to surprise is probably the highest. They're the most difficult to pin down. It is the case that within the UN population projections, they do make assumptions about migration, but within some countries in the European Union that's more uncertain. The broad pattern that we see in the data is one where parts of developed Europe are being effectively propped up by migration at the expense of emerging Europe. So emerging Europe, population is expected to fall on average a bit more than 10% by 2050. This helps to keep Germany's population fall to a more modest -6%, whereas it would have been around -10% otherwise. And immigration is actually expected to push France’s population to increase marginally, so maybe rising around about 2%. And if there was no migration, it would probably be falling almost to 5%. Now, of course, Eastern Europe is itself ageing quickly, so there is some risk that demographics here creates a bit of a negative feedback loop. If ageing countries are losing their workers, this puts extra strain on the sustainability of social welfare models and public debt. So, a more austere backdrop for public services could then actually spur more emigration, maybe worsening the drag just beyond that mechanical inclusion of having fewer workers and more old-age dependents. And then conflict, of course, is the major wildcard here. It's estimated that nearly one third of Ukrainians have been displaced both within and outside their country; over about four million registered for protection schemes within Europe since the war in Russia began; and around about one and a half million now in Poland, and Germany hosting around about 900,000. But the refugee situation remains exceptionally fluid. There's been large numbers of returners to Ukraine, making an assessment like the long-run effects very difficult. Within the UN population projections, which we're using as part of our growth work, it assumes that the impact from Ukraine on the working age population effectively peaks around about 2024, but then actually largely unwinds in the following three to four years. But there's clearly a risk here that prolonged conflict leads to a much more permanent exodus – I guess, propping up developed Europe again, on that side. Interestingly, the OECD estimates that about 1.2 million Ukrainians will actually join the EU workforce in the long run, primarily working in the service sector. So, we just can't really predict those sorts of events and how migration flows will unfold.

Luke Bartholomew

So taking us back, Bob, to this concept of the production function that I was asking you about earlier, I guess one idea that's very much associated with that way of thinking about growth, at least when it comes to questions of standards of living in GDP per capita, is of catch up – that there are some countries at the frontier of production. I guess, in this particular case, the developed world and the US, in particular, and then there are lots of other countries who, by building up their capital stock, both physical and human, and importing some of the innovations of the cutting edge countries into their own economies, they can enjoy a sustained period of high growth as they converge and catch up on the frontier. Now, it's turned out in practice to be rather more difficult than that, theory would suggest, in terms of delivering convergence. And there's been a lot of countries that have been caught in the so-called middle income trap – they’ve never been able quite to converge to the developed world frontier. So, I wondered if you had any thoughts about this sort of convergence versus middle income trap dynamics? And I suppose, in particular, the question – or the economy – that's really pressing in that regard is China, and what its prospects are in terms of convergence? And maybe to put the question in a slightly ‘sloganistic’ way: what are the chances that China grows old before it grows rich?

Bob Gilhooly

Yeah, thanks. There's nothing preordained about the ability of emerging markets to become advanced economies and converge without frontiers, as you noted. In recent history, it's fairly packed full of examples, actually, of emerging markets seemingly being on strong growth paths, then for hopes to only be dashed. So, just to pick one example: after a period of very impressive catch-up growth in the 2000s, Brazil then effectively has gone backwards for a long period, particularly after 2015. So, a lot of things matter within this kind of equation that you can't really capture within your production function: institutional quality, strength, corruption, education, health – just to name a few other dynamics. Turning to China there, we do know for sure China is going to get old. And this opens up a few risks. The one I'd probably focus on here is the risks around real estate. I mean, after all, we know real estate is driving somewhere between 15 to 25% of the economy, depending on how you measure upstream and downstream linkages. And clearly, you don't need as many houses if your population is falling. So, there's a risk here of this kind of inability to transition to a new growth model – one that's less reliant on real estate investment. The good news – I’d probably a couch that as relative good news – is that China's population might be declining with, 2022, but in the first year of decline, it doesn't necessarily seem like a sort of impending collapse and underlying housing demand. Aside from urbanisation, which we still think has still some ways to run, China’s private housing market really only began in the late 1990s, implying that considerable scope remains to upgrade the housing stock. And then it's the demographic shifts that matter just as much as the overall population moves. So, considering household formation by five-year age groups implies there is still a somewhat powerful batting average effect going on. So changing the core population composition, continues to drive household formation, we think at a fair pace, until about 2035. That should be enough to sort of drive around about 4 million or so households being formed each year. Household formation itself doesn't actually peak until almost 2045, so well behind the peak in population. Of course, this is still a weakening tailwind; four million additional households per year is around half the rate that we had between 2000 and 2010. And there's a non-trivial risk of excess inventory, needing to be unwound. But I think there's some good news as well. Sectoral relocation from agriculture to manufacturing and services kind of goes hand in hand with continued urbanisation; share of workers in agriculture looks probably about where you'd expect it to be given China's stage of development. So even if the population has started to decline, it doesn't mean that labour supply has been exhausted. You can still move people from agriculture into manufacturing. And I think this should keep the middle income trap at bay for a while longer. So, I think this debate will rage on, but I think the crunch points are still a way off actually.

Paul Diggle

I want to ask you a bit more, Bob, about urbanisation trends then, especially in China and in Asia, as a driver of growth, because we did an early podcast in our series on the future of cities, deep during Covid-19, where people were questioning the future growth of cities and urbanisation in the developed market economies. That was worrying at the time because agglomeration benefits packing people together in cities, has this positive externality of raising productivity. So, back to the production function, it's a crucial way in which productivity and therefore long-run growth increases over time. And of course, urbanisation trends have all sorts of other investment implications as well, not least, for the demand for urban infrastructure. Across the Asian economies that you've been speaking about, how much further does urbanisation have to run? Have those easy gains already been used up? Or is there still plenty of urbanisation still coming down the tracks?

Bob Gilhooly

Yeah, I think overall, it's a bit of a mixed picture. But the tailwind from urbanisation is still there. It might be slowing, but it's still a positive driver for Asia overall. And as you said, as the urbanised should correspondingly drive, still quite a lot of construction activity. Even emerging markets with the kind of relatively unfavourable demographics, they still need more transport building and public service infrastructure. Still the case, the capital stock per worker is well below that in developed markets. Hence, kind of capital deepening across a wide array of categories – your buildings, your plant and machinery, vehicles, software and ICT say nothing of that kind of green energy needs – should offset or more than offset by the drag from chronic and the capital stock from having fewer workers. It's also the case that emerging markets tend to have slightly higher depreciation rates in developed markets, hence that kind of upgrading and maintenance needs, they still need to be met at a slightly higher pace, all which suggests a very substantial flow of investment. In fact, our calculations suggest that one out of every $2 spent on global investment is going to be in Asia. And that equates to a fairly staggering $390 trillion dollars in total investment flows out to 2050. That's all in real terms as well.

Luke Bartholomew

So, given that rather staggering figure that you quoted there, Bob, it's perhaps unsurprising that a big theme in markets for years, if not decades, is the divergence of Asian growth experiences from the rest of the world. And it's certainly been a theme in this conversation, too, I suppose. But in particular, people are interested in the idea of the rise of the Asian middle class consumer as a big driver of global growth. So what observations do you have on that as the importance of Asia becoming its own distinct engine of global growth going forward?

Bob Gilhooly

Yeah, there's a bit of a risk here. Decoupling has been prematurely discussed for many years. I'm sure I've seen reports of this stretching back virtually to when China joined the World Trade Organisation. I think in this kind of high level, we're talking about 25-year timeframe here, there is kind of something to this. Since consumption share of GDP tends to rise, and correspondingly investment share tends to fall as countries develop, the consumption moves underneath the surface, or even bigger than the headline growth numbers that we've been talking about here. So, if I took China as an example, current consumption within GDP is around half that of the US, if we look at the real dollar figures. And given the lower share of consumption in China, it's going to take a bit longer for Chinese consumption to overtake that of the US. But that's starting from a kind of lower base too, so, by 2050, could be about 10% larger, around about $25 trillion, which is about a threefold rise in China's consumption within GDP. And there's some pretty punchy numbers coming out of the rest of Asia too. So India's consumer market could perhaps grow by fourfold over the next 30 years; emerging Asia, we think – outside China and India – could probably more than double. By comparison, in the euro area, consumption is only growing about 15 to 20%. So, these are some really big moves happening. And I think those kind of consumption becomes this much larger share; it is going to be natural to think of Asia becoming a bit decoupled, a bit more of a kind of driver in its own right. And then as Asia's middle classes expand alongside incomes, we do think the nature of consumption within this is going to evolve too, increasingly resembling that seen in kind of middle and high-income economies. So, the share of expenditure on kinds of essentials such as food and clothing should be falling; the share of expenditure on housing, healthcare, transport, and other items, such as personal care, should be rising. And this is the backdrop where I think these patterns are going to also be amplified by the demographic shifts. So, this kind of emergence of a silver economy as populations age and become a bit older, should further boost spending in some of these categories, particularly those like healthcare.

Luke Bartholomew

I think that is all that we have time for this week. So, as ever, please do indulge me as I ask you to like and subscribe to us on your preferred podcast platform. And then all that remains is for me to thank Bob for his excellent contributions and the report that underlies the analysis today, and also to thank you all for listening. So, thanks very much and speak again soon.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer investment, recommendation, or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates and provides no guarantee of future results.

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