We were all lucky to be born at the right time. Over the past fifty years, world GDP growth has been averaging 3.6 per cent, driven by employment increases and productivity improvements in roughly equal proportions. An exhaustive and important study by the McKinsey Global Institute concludes that over the next 50 years population growth will decline to .3 per cent annually. If productivity continues to contribute 1.8 per cent, overall growth will decline to 2.1 per cent, a rate 40 per cent less than during the past half-century. Because while I have been worried about a lack of demand causing a slowdown in growth, I had not thought that the main problem might be that there aren’t enough people out there to do the buying. The implications of this slowdown on global changes in the standard of living and investment opportunities could be enormous.
The global economy grew sixfold in the past 50 years. Taking into account the projections above, it is only expected to grow threefold in the next 50. Population growth rose because of high fertility rates, declining infant mortality and longer life expectancy. Also, the number of people of working age (15-64) grew from 58 per cent of the population in 1964 to 68 per cent in 2014. The productivity improvement resulted from a shift from agriculture to manufacturing and services. Technology obviously played an important role. According to the McKinsey study, the average world employee today generates 2.4 times the output of his counterpart in 1964. Because Europe and the United States were relatively efficient in 1964, their productivity only rose 1.5 per cent and 1.9 per cent annually respectively, while South Korea and Japan rose 4.6 per cent and 2.8 per cent respectively. As expected, China’s productivity grew at 5.7 per cent annually, but Mexico and Saudi Arabia experienced less than 1 per cent annual productivity growth. The study notes that the productivity gap between the developed and the developing economies remains wide, at almost five times, providing a significant opportunity for emerging markets going forward.
The big change in the future will be the slow growth in population. Fertility rates are declining, and the average age of the population in Europe, China and Japan is rising. China’s peak employment is expected to occur in 2024. The working age population in the G19 countries plus Nigeria is expected to decline from 68 per cent to 61 per cent over the next 50 years. By 2064 India’s employment could expand by 54 per cent, while China’s could shrink by 20 per cent.
Population decline
The McKinsey estimates of annual population growth seem low to me, but the concept of slower growth in the number of people in the world appears sound. A somewhat less pessimistic study of population growth was prepared for me by Dick Hokenson, the demographic analyst at Evercore ISI. He points out that the G19 plus Nigeria universe includes Germany, Russia, Japan, China and South Korea, all of which will experience overall declines in their populations and labour forces over the next fifty years. If you look at the entire world, the decline in growth is still significant but goes only from 1.8 per cent to about .5 per cent. By 2014, world population had risen to 6.4 billion from 2.9 billion in 1964. I have seen estimates of 9 billion in 2064, implying a population growth roughly half that of the last fifty years.
The McKinsey study states that productivity improvement could compensate for the slower rise in population, but over the next 50 years it would have to be 80 per cent faster than the already rapid growth of the last half century. Given all the technology breakthroughs of the last few decades, including the cell phone, the personal computer and the internet, that accelerated rate seems unlikely to me. The study concludes that, worldwide, as much as three-quarters of productivity growth will come from a broader adoption of best practices. These opportunities exist in certain geographic areas and include using more effective retail formats, increasing the scale and capacity of automobile assembly, improving operational efficiency in health care and reducing waste in food service. In short, these opportunities will arise from “pushing the frontier” or innovation.
While one usually thinks adopting best practices applies mainly to manufacturing and services, agriculture continues to provide considerable opportunities. On the innovative side, the study argues that the technological advances of the last 50 years will continue to have a significant impact on productivity. Profit margins for the Standard & Poor’s 500 are currently above 10 per cent, having risen sharply since the end of the recession in 2009. Historically they have never been much higher than that. Margins have improved as a result of employing technology and keeping labour costs low. Capital equipment has been used to replace labour and the vast pool of people looking for a job has enabled companies to hire workers without significant increases in wages. As a result, unit labour costs have been rising very slowly.
Emerging markets
Productivity growth has actually slowed in the developed economies, from 3.2 per cent in the 1964-74 period to .8 per cent during 2004-14. In the emerging markets, however, it has more than doubled from 2.6 per cent during 1964-74 to 5.6 per cent in 2004-14. In 1964, the differential between the dollar output per employee in the developed economies versus the developing economies (on a purchasing power parity basis) was $32,000. Even though productivity has improved faster in the developing economies, the differential in 2014 was dramatically higher at $73,000 (Dh267,910).
We will need to focus on the implications of only modest population growth on economic expansion. The McKinsey report lists ten enablers of growth. They include improving the regulatory environment to encourage innovation, focusing on matching skills to employment opportunities in education, removing barriers to competition in service industries, improving cross border activity through trade pacts, encouraging more women to participate in the workplace, asking productive employees to work beyond the normal retirement age, improving infrastructure and stepping up research and development spending. Every one of these would contribute to growth but it is likely to be a slow-burner.
