Assessing global growth

09 May 2023

Despite worries about activity in the US and Europe, the global economy has not stopped growing. The IMF forecasts that the global economy will expand by almost 20% over the next five years, compared to its size last year. (This measure of GDP uses Purchasing Power Parity or PPP – currency exchange rates based on spending power in different economies. Using market exchange rates, which understate spending power, the global economy is expected to expand by 16% over this period).

20% growth global growth compares with a forecast 5.4% increase in the world’s population over the next five years. So despite an increasing world population, average GDP per capita is forecast to grow by nearly 14% by 2028 with the strongest gains being seen in emerging and developing economies.

This represents the next stage of a process of economic expansion that has been underway since the Industrial Revolution. (Of course, what is far more recent is the understanding of the connection between growth and carbon emissions, a realisation that is transforming economic policy – but has yet to arrest the rapid growth of emissions).

Growth has been in short supply in many European countries, especially the UK, for over a decade. But for all the angst about declining productivity growth in the West the dominant global story remains one of growth, not stagnation.

China has been the engine of global growth for last 20 years, making an outsize contribution to the doubled in size of the global economy over this period.

Despite a shrinking population and slowing growth, China’s sheer scale, some 1.4bn people, combined with a growth rate of around 4.0% means that the Chinese economy is likely to expand by a quarter by 2028.

Such growth in the world’s largest economy would see China accounting for 27% of global growth between 2022 to 2028. (Chinese GDP exceeds America’s when using PPP. On market exchange rates the US is the world’s largest economy and is set to remain so in the medium term).

If you Google the term ‘US decline’ you will find plenty of articles arguing that America is a power in economic decline. The opponents of such a view can take some comfort from the fact that the IMF reckons the US will be the fastest growing G7 country over the medium-term despite the fact that it is already richer on a per capita basis than any other G7 country.

A recent article in The Economist deployed a range of data to argue against the declinist view of the US. On the question of living standards, one of the most remarkable ones was that “a trucker in Oklahoma can earn more than a doctor in Portugal”. Less graphical, but equally striking, is the fact that that GDP per capita is about 20% higher on a PPP basis in the US than in Germany according to the IMF.

The IMF forecasts that the US will account for 20% of global growth up to 2028, in part because its population is forecast to increase by 13m between 2022 to 2028.

As China’s growth rate slows we are likely to hear more about growth elsewhere in Asia. The Indian economy is now more populous than China’s and its growth rate is forecast to eclipse China’s over the next five years. Growth elsewhere in Asia, in Vietnam, Bangladesh Indonesia, the Philippines, Malaysia and Cambodia also looks set to outpace Chinese growth. Vietnam and Bangladesh are growing particularly quickly. The IMF forecasts their economies are likely to expand by almost 50% between 2022 and 2028.

These countries have benefitted from companies looking to shift their supply chains outside of China. For many of these countries, their labour costs are now far below those seen in the manufacturing hubs of China.

South Korea is perhaps the clearest example of a development success story. As recently as 1980, South Korean GDP per capita was just 20% of that of the UK. By 2024, the IMF expects South Korean GDP per capita to exceed the UK’s. Yet South Korea is still classified by some as an emerging market, a description that now seems hopelessly out of date.

Many of the fastest growing countries over the next five years are likely to be in sub-Saharan Africa. Uganda, Tanzania, Ethiopia, Rwanda, Kenya and Senegal are just some of the African countries which the IMF sees growing by an average of over 5.0% a year between 2022 and 2028.

A number of advanced economies including notably Japan, Italy and Germany are predicted to see very slow economic growth rates over the coming years, in part as a result of ageing populations. For Italy, Japan and Germany, their populations are forecast to fall in the next 5 years.

For all the problems of the West, the global economy is continuing to grow and that growth is helping improve the human condition. The number of people living in extreme poverty has fallen from almost 2bn to 0.66bn since 1992. This achievement is all the more remarkable when one considers that the world’s population has expanded by almost 3.5 billion in this period.

The poverty-reducing effects of growth are clear. But so, too, are its impacts on the environment and world temperatures. The quest for carbon-free growth is arguably the greatest economic challenge of this century.

For the latest charts and data on health and economics, visit our Economics Monitor:
https://www2.deloitte.com/uk/en/pages/finance/articles/covid-19-economics-monitor.html

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 0.7% at 7,778.

Economics

US treasury secretary Janet Yellen has warned of a “constitutional crisis” and the risk of an economic disaster if Congress does not increase the federal debt limit
Shares in US bank PacWest fell over 70% last week before staging a recovery last Friday and on Monday
Shares in a number of other US regional banks also fell sharply and then recovered some of their losses; the pressure on US regional banks follows the failure of First Republic Bank on 1 May, the second-largest bank failure in US history
The US economy added a greater-than-expected 253,000 jobs in April while the unemployment rate fell to 3.4%, suggested continued tightness in the American labour market
The World Health Organisation declared an end to the COVID-19 global emergency, over three years after it was first declared
Domestic tourism in China exceeded its pre-pandemic peak during the May Day holiday
Gold hit an all-time high of $2,071/troy ounce last week following concern over the US banking sector and resurgent demand for gold from China
Sterling hit an 11-month high of $1.26 against the dollar as markets assumed that UK rates would continue to rise as the pace of Fed rate rises slows
UK house prices rose by 0.5% from March to April, according to estimates from Nationwide
Output from the UK service sector rose in April at the fastest pace in a year with particularly strong growth in tourism, leisure and travel according to the Purchasing Managers
Shares in UK housebuilders have rallied since the beginning of the year as investors increasingly expect a significant house price crash to be avoided
UK households drew down on their stock of savings in March, with the combined value of their bank deposits and NS&I savings falling by £1.3bn
The European Central Bank raised interest rates from 3.0% to 3.25% and its president Christine Lagarde said that “we are not pausing” monetary tightening
The US Fed raised interest rates by a quarter point to target a range between 5% to 5.25%; Chair Jay Powell said that “there is a sense that, you know, we’re much closer to the end of this than to the beginning”
Falls in German industrial production and retail sales fuelled concerns about the risk of the German economy falling into recession
Euro area inflation rose to 7.0% in the 12 months to April, up from 6.9% the previous month

Business

The UK competition regulator announced it was opening a review into AI models
Warren Buffett said that the UK was wrong to block Microsoft’s planned $69bn takeover of Activision
11,500 film and television writers in the US went on strike over compensation; they also demanded that AI only be used to assist writers rather than replace them
Online study guide publisher Chegg warned that the growing popularity of AI chatbots was hitting its revenues
HSBC shareholders rejected a proposal that would have seen it split its operations in Asia from the rest of the business
The CEO of UK utility Octopus Energy said that artificial intelligence is doing the work of 250 people in answering customer emails and achieving higher customer satisfaction scores
The UK’s Skipton building society will be the first since 2008 to offer 100% mortgages
A number of airlines including IAG, Air-France KLM and Lufthansa have said they expect to see robust demand over the summer, including from leisure travellers, despite the ongoing squeeze on household incomes
UK City regulator the FCA published proposals to simplify the rules for listed companies in a bid to increase the competitiveness of the UK listing regime; the number of listings in London is down by 40% since 2008
UK railway workers represented by the RMT union voted for further strikes in a long-running dispute over pay with train companies

Global and political developments

The US published intelligence estimating that 20,000 Russian troops have been killed in Ukraine since December with 80,000 wounded
The ruling UK Conservative party suffered steep losses in local elections while the Labour, Liberal Democrat and Green parties made gains
Former UK Conservative chancellor George Osborne called for a ban on smoking
The FT reported that the Labour Party intends to increase the stamp duty paid by foreign buyers of UK property and restrict the sale of new-build properties to overseas investors
UK Labour leader Keir Starmer abandoned a promise to scrap university tuition fees in England if it wins office
The EU signed off on Bulgaria, Hungary, Poland, Romania and Slovakia imposing a ban on imports of Ukrainian grain to protect their farmers’ commercial interests

And finally… classified plans relating to Britain’s nuclear submarine programme were found in the toilets of a Wetherspoons pub in Barrow-in-Furness – sub-standard security

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