World in 2050

8 August 2016

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.

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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:

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