Global Growth Outlook:

Transcription

1 AUG 2015 Global Growth Outlook White Paper Global Growth Outlook: Irina Tytell, PhD Senior Research Analyst, Asset Allocation Research Lisa Emsbo-Mattingly Director, Asset Allocation Research Dirk Hofschire, CFA Senior Vice President, Asset Allocation Research We think that the global economic landscape is likely to look quite different over the next 20 years compared to the past 20 years, and that a forward-looking approach to developing capital market assumptions may provide a better chance for success in this dynamic environment. GDP: Population growth and productivity Generating long-term global GDP forecasts is the first step in that process. GDP can be separated into two components: population growth or the increase in the number of people and productivity growth or the increase in output per person (see Exhibit 1). Taking a forward-looking approach to global growth forecasts Our research, which is not dependent on historical averages, has a global focus that is more reflective of the worldwide opportunity set for growth. This approach helps us to make direct comparisons while still capturing the different characteristics that make economies unique. EXHIBIT 1 KEY DRIVERS OF GDP GROWTH Population growth and productivity growth are key determinants of economic growth POPULATION GROWTH PRODUCTIVITY GROWTH GDP GROWTH Working-Age Population People Structure LABOR FORCE Participation Rate Catch-Up Other Not FDIC Insured May Lose Value No Bank Guarantee

2 AUG 2015 Global Growth Outlook White Paper Slower growth is expected to result in a historically lower interest rate climate and be less of a tailwind to equities

3 Growth of Labor Force Slows Of the two primary determinants of GDP growth, population growth is easier to forecast, as demographic trends tend to vary less over time than other economic data. The growth in a country s labor force has the most direct impact on GDP growth. Labor force participation rates have risen rapidly for several decades, but almost all countries will experience slower growth and receive less of a direct demographic benefit over the next 20 years. Some mature countries such as Japan and parts of Europe with the U.S. as a notable exception will experience outright declines in labor force participation. In general, growth will be faster in the developing world Latin America, parts of emerging Asia, the Middle East, and Africa although China s demographics are not as constructive (see Exhibit 2). EXHIBIT 2 LABOR FORCE GROWTH The contribution of labor force growth to economic growth will be much lower over the next 20 years ANNUALIZED GDP CHANGE (%) Germany Russia Japan Italy Spain Thailand South Korea France China U.K. Canada U.S. Brazil Australia South Africa Colombia Indonesia Mexico India Peru Philippines Source: United Nations data from March 2015; Haver Analytics, Fidelity Investments (AART), as of Dec. 31, Slower world growth may contribute to somewhat lower asset returns over the next two decades, but global opportunities for investment can continue to expand. Global Growth Outlook:

4 AUG 2015 Global Growth Outlook White Paper Key Drivers of Productivity We focus on three main categories of economic conditions that we have found empirically to be key drivers of productivity: people, structure, and growth potential. We also evaluate the risk of financial crisis. 1. Improved human capital The characteristics of a country s inhabitants affect productivity in several ways the greater the human capital, the more productive the economy. The higher educational and scientific achievements of the past two decades should boost global growth in the next 20 years. Human capital tends to be higher in the world s wealthiest regions, such as the U.S., Japan, and northern Europe. South Korea also has a high human capital ranking, and several emerging economies including China, Turkey, and Vietnam have also made great strides in the past 20 years. When we look at population, we also consider the sweet spot for productivity-enhancing demographics. It is somewhere near the middle when younger societies become more mature, but are not yet elderly. Maturing younger societies typically benefit from the greater aptitude for innovation and risk-taking that is likely more prevalent in youth, while increasing labor force participation and savings often lead to greater investments in physical and human capital. On balance, young populations in the developing world such as the Philippines, Mexico, and Colombia could benefit from a maturing phase. Formerly maturing countries such as China, South Korea, and Thailand could be disadvantaged as their populations enter the aging phase. Already-aging societies such as Russia, Germany, and Japan could feel the most negative effects on productivity as their demographics deteriorate further. 2. More complex economies point to higher productivity Complex economies tend to be more competitive, use technology more effectively, and have better business climates and more nurturing institutions. As a result, higher complexity typically means higher productivity. For example, Japan has the highest complexity ranking, while a number of African countries rank very low. Complexity should contribute slightly to higher global growth over the next 20 years, primarily due to increasingly complex emerging economies such as South Korea, Malaysia, and China. Countries undergoing a period of industrialization also tend to display faster productivity growth. Poorer developing economies like China, India, and Vietnam have seen manufacturing s share of output rise and agriculture s share decline dramatically over the past two decades. This shift has dampened the potential for rapid industrialization in the years ahead. 3. Diminished catch-up potential In theory, less advanced economies should grow faster than more mature economies, thanks to their ability to grow from a lower base, adopt existing technologies, and catch up to or converge with the higher income levels of developed countries. Catch-up potential has been and will continue to be a positive contributor to global GDP growth. After the rapid growth in recent decades of many larger developing economies, such as China, India, and South Korea, higher per capita incomes now leave less catch-up potential for the next 20 years. While many poorer economies in Asia, Latin America, and Africa will still benefit, catch-up potential will generally contribute less to global growth. 4

5 EXHIBIT 3 EMERGING ASIA: 1990S VS. TODAY Rapid growth has left many countries with less catch-up potential but higher sophistication Human Capital and Complexity High Sophistication, Less Catch-up Potential X-axis values represent catch-up potential, a country s per capita GDP relative to developed markets with the highest per capita GDP. Y-axis values represent each country s economic complexity and human capital score relative to developed markets. Negative scores represent less human capital and complexity than developed markets. Source: Hausmann, R., C. Hidalgo, et al. The Atlas of Economic Complexity: Mapping Paths to Prosperity. MIT and Center for International Development, Harvard, (2011), World Bank, Fidelity Investments (AART), as of Dec. 31, Financial crisis South Korea Malaysia China Thailand Indonesia Philippines CATCH-UP POTENTIAL India Low Sophistication, More Catch-up Potential While the risk of financial crisis among developed economies has diminished in recent years, the probability among emerging-market countries remains at an elevated level. The greatest risk is centered in China, where the rapid expansion of credit and housing prices in recent years has met or surpassed the excesses of other countries that have faced banking crises and substantial economic losses. As a result, we have adjusted downward our long-term forecast growth rate for China and several other emerging markets due to the higher probability that the financial turmoil could have a negative economic impact over that time horizon. EXHIBIT 4 PROBABILITY OF A FINANCIAL CRISIS (3 YEARS AHEAD) The risks of a financial crisis have declined in the developed world, while stresses are high in some EMs Banking Crisis Index (GDP-weighted) EMERGING MARKETS DEVELOPED MARKETS Asian Financial Crisis Global Financial Crisis EM Asia Stress EMs: emerging markets. Source: Risk is weighted by share of global GDP. The countries included in the index vary over time from 22 in 1933 to 30 currently. Source: World Bank, Fidelity Investments (AART), as of Mar. 31, Structural change from agricultural to industrial societies will contribute less to global economic growth over the next 20 years than in the past. Global Growth Outlook:

6 AUG 2015 Global Growth Outlook White Paper GDP Growth Slowdown Forecasted Using projections for 40 countries within the MSCI All Countries World index, we estimate that about fourfifths of these countries could experience slower growth, including all the developed economies (see Exhibit 3) 2.1% annually over the next 20 years. In general, worsening global demographics are expected to take the largest toll on the global forecast relative to historical trends. In addition, rapid gains in emerging Asia in recent decades may leave less room for industrialization and catch-up potential from low income levels than before, as discussed above. Nevertheless, our forecasts indicate that global growth should still be positive. Improved human capital and increased economic complexity could benefit productivity growth in many developing economies. Emerging economies with higher growth rates will account for a greater component of global growth moving forward composing half of global GDP by 2034, compared with just one-third in 2014, and under one-quarter in 1994 helping to offset the weaker outlooks for Japan and many European countries. EXHIBIT 5 WORLD S LARGEST ECONOMIES We estimate several emerging markets will be among the largest global economies by 2034 United States China India Japan Brazil Germany United Kingdom France Russia Canada Indonesia South Korea GDP IN 2014 PROJECTED GDP GROWTH BY TRILLIONS USD RANKINGS In 20 Today years Source: Haver Analytics, Fidelity Investments (AART), as of Dec. 31, We forecast a global GDP growth of 2.1% annually over the next 20 years, compared with the 2.7% averaged over the past two decades. Source: See Exhibit 6 6

7 What Does Slower Global Growth Mean for My Portfolio(s)? All else being equal, slower global growth should provide less of a tailwind to asset returns over the next 20 years than during the post-world War II period. Although this is primarily attributable to the weaker demographic backdrop in most countries, it is partly related to some larger developing economies having reached a more advanced stage, and thus a slower pace of expected growth. EXHIBIT 6 REAL GDP GROWTH FORECAST, The world economy will grow more slowly, with the highest growth rates found in developing economies Annualized Rate (%) Opportunity in emerging economies As a group, developing countries will have faster rates of growth than advanced economies, but will have slower rates of growth than they experienced in the past 20 years, with considerable variation across countries. 2. Consider your fixed-income For fixed-income assets, GDP growth has a positive relationship with interest rates, yet bond returns must be modified for starting yields and other considerations. Slower growth implies that interest rates will remain lower than historical averages, even as they rise over time from low current levels Global Growth Rate = 2.1% Japan Italy Germany Netherlands Spain France Australia U.K. Sweden Canada U.S. Russia South Korea Thailand South Africa Mexico Brazil Turkey Peru Malaysia China Colombia Indonesia Philippines India Source: Fidelity Investments (AART), as of Dec. 31, Global Growth Outlook:

8 tviews expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information. Investment decisions should be based on an individual s own goals, time horizon, and tolerance for risk. Investing involves risk, including risk of loss. Past performance is no guarantee of future results. Diversification and asset allocation do not ensure a profit or guarantee against loss. All indices are unmanaged. You cannot invest directly in an index. REFERENCES Barro, R. Economic Growth in a Cross Section of Countries, The Quarterly Journal of Economics, Vol. 106, No. 2. (May 1991): Barro, R. and X. Sala-i-Martin. Convergence, Journal of Political Economy, Vol. 100, No. 2 (April 1992): Cowen, T. The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better. Dutton (2010). Gordon, R. Is U.S. economic growth over? Faltering innovation confronts the six headwinds, Centre for Economic Policy Research, Policy Insight No. 63 (September 2012). Hausmann, R., C. Hidalgo, et al. The Atlas of Economic Complexity: Mapping Paths to Prosperity, Harvard Center for International Development, Harvard Kennedy School, MIT Media Lab (2011). Jones, C. The Upcoming Slowdown in U.S. Economic Growth, NBER Working Paper, No (November 1997). Kannan, P. Credit Conditions and Recoveries from Recessions Associated with Financial Crises, International Monetary Fund (March 2010). Reinhart, C., and K. Rogoff. Growth in a Time of Debt, American Economic Review: Papers & Proceedings, Vol. 100, No. 2 (May 2010): Not NCUA or NCUSIF insured. May lose value. No credit union guarantee. Third-party trademarks and service marks are the property of their respective owners. All other trademarks and service marks are the property of FMR LLC or an affiliated company. If receiving this piece through your relationship with Fidelity Financial Advisor Solutions (FFAS), this publication is provided to investment professionals, plan sponsors, institutional investors, and individual investors by Fidelity Investments Institutional Services Company, Inc FIDELITY INVESTMENTS INSTITUTIONAL SERVICES COMPANY, INC., 500 SALEM STREET, SMITHFIELD, RI