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PwC Economics World in 2050 The BRICs and beyond: prospects, challenges and opportunities January 2013 World in 2050 Contents 1. Summary: the world in 2050 1 1.1. Key findings 1 1.2. Projections to 2050 1 1.3. Opportunities and challenges for business 3 1.4. Energy use and climate change: too late for 2 degrees? 3 2. 4 Introduction 2.1. Background on the 2050 reports 4 2.2. Our modelling approach 4 2.3. What has changed since the January 2011 update? 5 2.4. Structure of this report 5 3. 6 Key results 3.1. Relative size of economies 6 3.1.1. G7 versus E7 6 3.1.2. China, US and India likely to be dominant global economies by 2050 8 3.1.3. Beyond the top 3 countries 8 3.2. Relative GDP growth 10 3.3. Relative income levels 11 3.4. Focus on Poland and Malaysia 11 3.4.1. Commentary on long-term growth projections for Poland 11 3.4.2. Commentary on long-term growth projections for Malaysia 13 4. Potential obstacles to sustainable growth and the climate change challenge 14 4.1. Potential obstacles to sustainable growth 14 4.2. Energy use and climate change: too late for 2 degrees? 14 5. 16 Implications for businesses 5.1. Opportunities and challenges for Western companies 16 5.2. Increased focus on emerging consumer markets 16 Appendix A. Drivers of growth 18 A.1. Model structure 18 A.1.1. Demographics 18 A.1.2. Education 19 A.1.3. Capital investment 20 A.1.4. Technological progress 21 A.2. Real exchange rates: PPPs vs. MERs Appendix B. 21 Additional projections for GDP at market exchange rates 23 The BRICs and beyond: prospects, challenges and opportunities PwC  Contents World in 2050 1. Summary: the world in 2050 1.1. Key findings The world economy is projected to grow at an average rate of just over 3% per annum from 2011 to 2050, doubling in size by 2032 and nearly doubling again by 2050. China is projected to overtake the US as the largest economy by 2017 in purchasing power parity (PPP) terms and by 2027 in market exchange rate terms. India should become the third ‘global economic giant’ by 2050, a long way ahead of Brazil, which we expect to move up to 4th place ahead of Japan. Russia could overtake Germany to become the largest European economy before 2020 in PPP terms and by around 2035 at market exchange rates. Emerging economies such as Mexico and Indonesia could be larger than the UK and France by 2050, and Turkey larger than Italy. Outside the G20, Vietnam, Malaysia and Nigeria all have strong long-term growth potential, while Poland should comfortably outpace the large Western European economies for the next couple of decades. 1.2. Projections to 2050 This report updates our long-term global economic growth projections, which were last published in January 2011. These are based on a PwC model that takes account of projected trends in demographics, capital investment, education levels and technological progress. Chart 1 shows estimated relative GDP growth rates for the 24 economies in the study over the whole 2011-50 period. We can see that emerging economies tend to grow at 4% per annum or more, while advanced economies grow at around 2% or less – we will continue to live in a two-speed world economy for some decades to come as a catch up process continues. Chart 1: Breakdown of components of average real growth in GDP at PPP (2011 – 2050) % change per annum 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% Average growth in GDP per capita Average population growth GDP growth (PPP) The changing league table of world GDP at PPPs is shown in Table 1 below. Selected countries are marked in bold to highlight notable changes in rankings over time. The BRICs and beyond: prospects, challenges and opportunities PwC  1 World in 2050 Table 1: Actual and projected top 20 economies ranked based on GDP in PPP terms 2011 2030 PPP rank Country 1 US 15,094 China 30,634 China 53,856 2 China 11,347 US 23,376 US 37,998 3 India 4,531 India 13,716 India 34,704 4 Japan 4,381 Japan 5,842 Brazil 8,825 5 Germany 3,221 Russia 5,308 Japan 8,065 6 Russia 3,031 Brazil 4,685 Russia 8,013 7 Brazil 2,305 Germany 4,118 Mexico 7,409 8 France 2,303 Mexico 3,662 Indonesia 6,346 9 UK 2,287 UK 3,499 Germany 5,822 10 Italy 1,979 France 3,427 France 5,714 11 Mexico 1,761 Indonesia 2,912 UK 5,598 12 Spain 1,512 Turkey 2,760 Turkey 5,032 13 South Korea 1,504 Italy 2,629 Nigeria 3,964 14 Canada 1,398 Korea 2,454 Italy 3,867 15 Turkey 1,243 Spain 2,327 Spain 3,612 16 Indonesia 1,131 Canada 2,148 Canada 3,549 17 Australia 893 Saudi Arabia 1,582 South Korea 3,545 18 Poland 813 Australia 1,535 Saudi Arabia 3,090 19 Argentina 720 Poland 1,415 Vietnam 2,715 20 Saudi Arabia 686 Argentina 1,407 Argentina 2,620 GDP at PPP (2011 US$bn) Country 2050 Projected GDP at PPP (2011 US$bn) Country Projected GDP at PPP (2011 US$bn) Source: World Bank estimates for 2011, PwC estimates for 2030 and 2050 However, even in 2050 average income per capita will still be significantly higher in the advanced economies than in the emerging economies – the current income gap is just too large to bridge fully over this period. In contrast to recent arguments by Professor Robert Gordon and some other commentators 1 , we do not expect a significant slowdown in the global pace of technical progress given the scope for further major advances in areas like ICT, biotechnology and nanotechnology, although emerging economies like China and India will play an increasing role in these developments in future decades. This will further fuel their catch-up process with the more sluggish advanced economies. 1 As discussed further in Section 4.1 below. The BRICs and beyond: prospects, challenges and opportunities PwC  2 World in 2050 1.3. Opportunities and challenges for business These projected long-term growth trends pose many opportunities and challenges for businesses in the UK and other Western economies. China, India, Brazil and the other emerging markets highlighted in our study will become not just low cost production locations but also increasingly large consumer markets. At a time when trend annual growth is projected to be no more than around 2% in the advanced economies, companies seeking growth will need to look increasingly to these emerging markets. At the same time, such markets can be challenging places to do business. It will be important to understand and adapt to local rules, regulations and customs. The right entry strategy and, where appropriate, the right joint venture partner(s) will be crucial, as will good relations with local government and regulatory bodies. In some cases, the optimal production locations may not be the same as the largest consumer markets (e.g. investing in Malaysia, Indonesia or Vietnam as a gateway to China or India, or in Poland as a gateway to Russia). 1.4. Energy use and climate change: too late for 2 degrees? There are also important challenges for governments, not least regarding natural resource constraints such as those relating to energy use and climate change. As our analysis shows, a ‘business as usual’ approach based on our GDP growth projections could see global warming of 6˚C or more in the long run, while the UN’s 2˚C objective seems increasingly out of reach given the lack of progress on decarbonisation since 2000. A more plausible and affordable ‘gradual greening’ scenario might see decarbonisation at a rate sufficient to broadly offset the effects on emissions of economic growth, so leaving total global carbon emissions in 2050 at similar levels to today. But even this scenario would still be consistent with 4 degrees of global warming in the long run – it may already be too late for 2 degrees as our latest Low Carbon Economy Index report discusses in more detail.2 Such climate change will in itself create new opportunities for business, however, for example in mitigating the risks from severe weather events in parallel with developing new greener technologies. 2 http://www.pwc.co.uk/sustainability-climate-change/publications/low-carbon-economy-index.jhtml The BRICs and beyond: prospects, challenges and opportunities PwC  3 World in 2050 2. Introduction 2.1. Background on the 2050 reports In March 2006 we produced a report setting out projections for potential GDP growth in 17 leading economies over the period to 20503. These countries were:  The G7 (US, Japan, Germany, UK, France, Italy and Canada), plus Australia, South Korea and Spain among the current advanced economies; and  the seven largest emerging market economies, which we refer to collectively as the ‘E7’ (China, India, Brazil, Russia, Indonesia, Mexico and Turkey). There projections were updated in March 2008 and January 2011, expanding the country sample in the latter case to cover all of the G20 economies by adding Argentina, South Africa and Saudi Arabia. We also included Vietnam and Nigeria as potential fast-growing ‘wild cards’ outside of the G20. We are now revisiting these long-term GDP projections two years on from our last report and extending the sample to include Poland (as the leading EU economy in the Central and Eastern European region) and Malaysia (as a potential fast-growing medium-sized economy within the Asia-Pacific region that may provide a suitable launch pad for some Western companies investing in the region). Our analysis suggests that this group of 24 countries, which currently account for more than 80% of total world GDP, should include the 20 largest economies in the world looking ahead to the middle of this century. 2.2. Our modelling approach We use World Bank GDP data up to 2011 and our own medium term projections for real GDP growth between 2012 and 2017. We then use our long-term economic model to estimate trend growth rates from 2018 to 2050. These longer term trend growth estimates are driven by the following key factors (see Appendix A for more details):  Growth in the population of working age (based on the latest UN population projections).  Increases in human capital, proxied here by average education levels across the adult population.  Growth in the physical capital stock, which is driven by capital investment net of depreciation.  Total factor productivity growth, which is driven by technological progress and catching up by lower income countries with richer ones by making use of the latter’s technologies and processes. The emerging economies have stronger potential growth than the current advanced economies on most of these measures, although it should be stressed that this assumes that they continue to follow broadly growth-friendly policies. In this sense, the projections are of potential future GDP if such policies are followed, rather than unconditional predictions of what will actually happen, bearing in mind that not all of these countries may be able to sustain such policies in the long run in practice. There are, of course, many uncertainties surrounding these long-term growth projections, so more attention should be paid to the broad trends indicated rather than the precise numbers quoted in the rest of this report. The broad conclusions reached on the shift in global economic power from the G7 to the E7 emerging economies should, however, be robust to these uncertainties, provided that there are no catastrophic shocks (e.g. global nuclear war, asteroid collisions, extreme global climate change etc) that derail the overall global economic development process on a sustained basis. Such shocks should be distinguished from shorter term cyclical variations, which will inevitably occur to a greater or less degree in all economies, but should not materially alter underlying average trend growth rates over the four decade period that we are considered. 3 Some of our earlier World in 2050 series reports are available here: http://www.pwc.com/gx/en/world-2050/index.jhtml The BRICs and beyond: prospects, challenges and opportunities PwC  4 World in 2050 2.3. What has changed since the January 2011 update? We have made three main changes to the analysis since our last published update in January 2011: 1. We have updated historical data in the model so that the base year is now 2011 rather than 2009. Our medium term projections to 2017 also take account of the slowdown seen in most economies in 2011-12, although this does not have a large impact on the longer term trend growth rates projected by the model for the period beyond 2017. 2. We have added Malaysia and Poland to the analysis and include commentaries by senior PwC economists from these two countries in Section 3.4 below. 3. We have improved the way in which long-run exchange rate trends are modelled. A country’s real exchange rate trend is still determined by convergence towards the PPP equilibrium rate as they grow richer, but the basis for this convergence assumption is now anchored more firmly in historic trends. 2.4. Structure of this report The rest of the report is structured as follows:  Section 3 summarises the key results of the analysis in terms of projected GDP levels, growth rates and average income trends to 2050.  Section 4 discusses the potential obstacles to sustained long-term global growth, including in particular the challenge of high energy use and associated climate change risks.  Section 5 highlights the implications for business of the projected growth trends. Appendix A provides further details of our methodological approach, including the assumptions made on the key drivers of growth in the model. Appendix B includes some additional results based on GDP at market exchange rates (MERs). This supplements the material in Section 3, which focuses more on the results for GDP at purchasing power parities (PPPs)4. The reason for focusing on GDP at PPP results is that this avoids uncertainties associated with projecting real exchange rates, as well as providing a better measure of relative living standards across countries. However, MER-based projections are relevant for many business applications, which is why we include more detail on these in Appendix B. 4 The BRICs and beyond: prospects, challenges and opportunities PwC  5 World in 2050 3. Key results 3.1. Relative size of economies 3.1.1. G7 versus E7 In this section, we look at how the relative sizes of different economies are projected by our model to change over time. As Chart 2 shows, our base case projections suggest that the E7 countries will be more than 50% larger than the G7 countries when measured by GDP at market exchange rates (MER) by 2050 and around 75% larger in PPP terms. In contrast, the E7 is currently just under half the size of the G7 economies based on GDP at MERs and just over 80% of the size of the G7 based on GDP measured in PPP terms. Chart 2: Relative size of G7 and E7 economies: 2011 and 2050 GDP (constant 2011 US$bn) 1,20,000 80,000 40,000 0 2011 MERs 2050 MERs 2011 PPPs G7 GDP 2050 PPPs E7 GDP GDP (constant 2011 US$bn) Chart 3: E7 and G7 growth paths in PPP terms 1,40,000 E7 1,20,000 1,00,000 G7 80,000 60,000 40,000 20,000 0 2011 2016 2021 2026 2031 E7 GDP (PPP) 2036 2041 2046 G7 GDP (PPP) Chart 3 shows that:  The E7 countries could overtake the G7 countries as early as 2017 in PPP terms. This rapid convergence between these two groups of economies has been accelerated by the fact that the developed countries have been much slower to recover from the recession of 2008-9, whilst the emerging economies have been relatively insulated despite some slowdown in 2011-12.  The gap between the E7 and G7 countries is projected to continue to widen after 2017 - the E7 countries could potentially be around 75% larger than the G7 countries by the end of 2050 in PPP terms. The BRICs and beyond: prospects, challenges and opportunities PwC  6 World in 2050 Chart 4, which shows the growth paths of the E7 and the G7 in MER terms, paints a similar picture, with the exception that the year in which the E7 overtakes the G7 is pushed back to around 2030, rather than 2017. This is because price levels in the E7 economies are, on average, still well below G7 levels when compared using current market exchange rates – in other words, MERs in the E7 economies are well below purchasing power parity (PPP) levels. GDP (constant 2011 US$bn) Chart 4: E7 and G7 growth paths in MER terms E7 1,20,000 1,00,000 80,000 G7 60,000 40,000 20,000 0 2011 2016 2021 2026 2031 E7 GDP (MER) 2036 2041 2046 G7 GDP (MER) This is a commonly observed phenomenon for emerging economies, but past experience with previously fastgrowing countries such as Japan in the 1960s to 1980s or South Korea in the 1970s to 1990s suggests that MERs do tend to converge gradually with PPP rates as economic development continues. This could occur either through nominal exchange rate appreciation, or through relatively high domestic price inflation in the emerging economies, but in either case the result is likely to be long-run real currency appreciation. This effect5, based on an econometric equation estimated from past data, is incorporated in our model and forms the basis for our projections of GDP in MER terms as shown in Chart 4 above. However, these real exchange rate projections are highly uncertain in practice, so we put more weight on the PPP results in the rest of this section, with further details on the MER results being included in Appendix B given that these are relevant for many business applications. In the academic literature, this is referred to as the Balassa-Samuelson effect and is driven by relatively high productivity growth in the tradables sector feeding through to higher labour cost inflation in the non-tradables sector of emerging economies. 5 The BRICs and beyond: prospects, challenges and opportunities PwC  7 World in 2050 3.1.2. China, US and India likely to be dominant global economies by 2050 Much of the growth that we project to take place within the E7 economies will be driven by China and India. By 2050, China, the US and India are likely to be by far the three largest economies in the world as Chart 5 below illustrates. Chart 5: Relative GDP at MERs and PPPs in 2050 (as % of US level) Index relative to US = 100 160 140 120 100 80 60 40 20 0 GDP at market exchange rates in US $ terms GDP in PPP terms Our model suggests that China could overtake the US by 2017 in PPP terms, and by around 2027 in MER terms (see Chart 6). The MER estimate is, however, subject to our assumptions on the pace of convergence of China’s MER with its estimated PPP exchange rate, which we consider to be plausible but nonetheless subject to significant uncertainty. Chart 6: Projected GDP growth paths of China and the US GDP (constant 2011 US$bn) 60,000 China (PPP) China (MER) 40,000 US 20,000 0 2011 2016 2021 2026 China (MER) 2031 2036 China (PPP) 2041 2046 US China’s growth rate is expected to meet the government’s new 7% target for the current decade, but will cool down progressively during the period 2021 – 2050 as its economy matures. A rapidly aging population and rising real labour costs are expected to see China transition from being an export-orientated economy to more of a consumption driven economy. Western companies are also likely see a change in the way they do business in the region – rising costs will mean that many off-shored jobs are likely to exit China over time for other cheaper economies such as Vietnam and Indonesia, whilst Chinese exporters will find themselves competing more on the basis of quality rather than price in their key US and EU export markets. 3.1.3. Beyond the top 3 countries Table 2 summarises our projections for the largest 20 economies in 2011, 2030 and 2050, measured by GDP at PPPs. Selected countries are highlighted in bold in the table to make the evolution of their GDP rankings over time clearer. The BRICs and beyond: prospects, challenges and opportunities PwC  8