Sat, Dec 14, 2024 page7

• The eight headwinds threatening global growth next year

  The world economy is at risk of splintering. An era of upheaval could come next

  • By Dambisa Moyo
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  As we enter the second quarter of the 21st century, slow economic growth would remain the world’s most persistent challenge, transcending national borders and affecting developed and developing countries alike.

  The economies of the US, the EU and Japan are all projected to grow by less than 3 percent per year for the foreseeable future — the threshold needed to double per capita income within a generation (25 years). At the same time, large emerging economies, like Brazil, Argentina and South Africa, are also expected to experience sluggish growth over the next decade.

  While total global GDP has increased to US$110 trillion, progress remains unevenly distributed, threatening to erode living standards. Worse, the world economy faces powerful headwinds that could stifle growth, innovation and investment, triggering political and social instability.

  

  Illustration: Tania Chou

  Governments and business leaders must adjust their models and assumptions accordingly. In the face of significant policy shifts, investors would need to rethink their investment and allocation strategies to navigate an era defined by uncertainty and uneven growth.

  Looking ahead, eight risks to global GDP growth stand out: geopolitical fissures; divisive domestic politics; technological disruption and the rise of artificial intelligence (AI); demographic trends; rising inequality between and within countries; natural-resource scarcities; government debt and loose fiscal policies; and deglobalization. Taken together, these headwinds would be a persistent impediment to economic growth in the coming years.

  The first drag on global growth is the escalation in geopolitical tensions — particularly among the US, China and Russia — compounded by additional threats from Iran and North Korea. As the rift between developed and developing economies widens, developing countries are increasingly joining economic alliances like the BRICS bloc, which expanded from five members at the start of this year to nine by the end of the year. In the near term, there is a growing risk that this geopolitical tug-of-war could escalate into an all-out military conflict.

  Over the past 50 years, the world economy has gone from being a positive-sum game to a negative-sum game. The positive-sum era, driven by economic and global cooperation, reached its zenith during the Washington Consensus period, which was highlighted by the fall of the Berlin Wall in 1989 and China’s accession to the World Trade Organization in 2001. However, following the 2008 financial crisis, the world entered a negative-sum period, marked by declining growth, intensifying competition and rising international tensions, further heightened by the COVID-19 pandemic, Russia’s invasion of Ukraine and the Gaza War.

  Widening geopolitical fissures have laid bare deep vulnerabilities. China, for example, is one of the US’ largest foreign creditors, holding more than US$770 billion in US Treasuries. This gives it significant leverage over the US, whose policymakers increasingly regard it as a political and ideological rival. Against this backdrop, the intensifying race between China and the West for technological dominance in AI, quantum computing, and semiconductors has fractured the digital economy, giving rise to a balkanized “splinternet.”

  As decades of multilateral cooperation give way to economic fragmentation, new cross-country alliances have weakened the US-led international order and the Bretton Woods institutions, such as the World Bank and the IMF. The expanded BRICS bloc — led by Brazil, Russia, India, China and South Africa — is the most significant of these alliances, representing more than 40 percent of the world’s population and 36 percent of global GDP.

  Meanwhile, so-called “swing states,” like Turkey, Saudi Arabia and other Gulf Cooperation Council countries, are reshaping global trade routes, reconfiguring supply chains and redirecting investment flows, altering the distribution and pricing of key commodities such as foodstuffs and critical minerals.

  Beyond stifling global GDP growth, these geopolitical rifts are hindering collective efforts to tackle climate risks, as developed and developing economies remain deeply divided over the urgency, scope, and aggressiveness of the regulatory and policy reforms required to combat climate change and advance the clean-energy transition.

  Many advanced economies are also grappling with deepening political polarization at home. US president-elect Donald Trump’s return to the White House — much like Brexit and Trump’s first election victory in 2016 — heralds a period of widespread uncertainty and major political transformations.

  Amid these populist gales, developed economies’ budgets are increasingly strained by expanded welfare programs. In 2022, for example, the EU spent 3.1 trillion euros (US$3.3 trillion) — 19.5 percent of its GDP and nearly 40 percent of its total expenditures — on social protection.

  As demands on government budgets grow, worsening fiscal positions would make it increasingly difficult for many countries to provide essential public goods like health care, education and infrastructure. The resulting fiscal pressures would likely deepen polarization and lead to more policy volatility.

  While the rapid pace of technological advances, especially generative AI, have enormous potential to boost productivity and economic growth, they also carry significant risks. On the bright side, PwC projects that AI could add US$16 trillion to global GDP by 2030, potentially ushering in the first major economic super cycle in a half-century. The last super cycle, which began in the 1980s, was driven by the restructuring of supply chains that accompanied decades of globalization. However, since the early 2000s, developed countries’ productivity levels have stagnated, contributing to their relative economic decline.

  Early indications of AI’s potential impact on productivity and corporate efficiency are highly encouraging. A study by Erik Brynjolfsson and co-authors last year found that generative AI tools increased worker productivity by 14 percent on average and by 34 percent for new and low-skilled workers. Since productivity accounts for up to 60 percent of cross-country growth differences, these gains suggest that AI is poised to become a powerful engine of global GDP growth.

  The bad news is that AI could displace millions of workers, creating a vast jobless underclass. A Goldman Sachs report last year estimated that automation could eliminate 300 million full-time jobs, while a World Economic Forum survey suggests a significantly smaller net loss of 14 million jobs. Even so, the transition to an AI-driven world would pose unprecedented challenges for policymakers and business leaders.

  Moreover, there are valid concerns that the rapid growth of AI, coupled with the enormous amounts of energy required to operate data centers, is at odds with efforts to mitigate the worst effects of climate change and achieve a smooth energy transition. Business leaders are already warning of overwhelmed electricity grids and rising energy prices, driven by higher transmission and distribution costs. In a world that is increasingly reliant on energy-intensive technologies, these developments could have far-reaching consequences.

  In the near term, overinvestment could lead to significant capital misallocation as investors rush to capitalize on the AI boom. Last year, the “Magnificent Seven” — the US’ leading tech companies — allocated more than US$200 billion to research and development, which was more than half of total R&D spending by Europe’s public, private and non-profit sectors.

  The current run rate of venture-capital investment in AI is roughly US$60 billion and, based on recent growth trends, could easily surpass US$100 billion in the near future. The revenue necessary to justify that amount of investment is likely on the order of US$25 billion per year. Given the lack of an AI “killer app” (OpenAI’s revenue run rate is only around US$4 billion), it seems likely that a significant amount of VC investments into AI would end up worthless. Sustained returns are highly improbable. Instead, many companies are likely to fail, resulting in vast sums of lost capital.

  The world is experiencing profound demographic shifts that affect both the size of the global population and the quality of the labor force. According to the UN, the world’s population is expected to grow from roughly eight billion today to 10.4 billion by 2100. While this headline figure is striking, it obscures underlying dynamics that, if left unaddressed, could constrain GDP growth.

  One particularly concerning trend is the inverse relationship between population growth and economic performance. Countries with rapidly expanding populations are experiencing slower economic growth, while the populations of high-performing economies tend to grow more slowly. Few countries manage to achieve both, raising concerns that global per capita income is on a downward trajectory.

  China is a prime example. The IMF projects the country’s GDP growth, currently hovering around 5 percent, to fall below 3.5 percent by 2029. Meanwhile, the UN estimates that China’s population would plummet to fewer than 800 million by 2100. In Europe, slow-growing economies like Italy and France have fertility rates far below replacement levels. By contrast, many poorer countries have much younger populations but face similarly grim growth prospects.

  Population trends have an outsize impact on what the world produces and consumes. For example, while India’s population has already surpassed China’s, India remains five times poorer in terms of per capita GDP. This disparity shapes the world’s consumption basket, as larger, poorer populations are more likely to consume cheaper products, such as coal instead of renewable energy.

  More broadly, longer life expectancies and declining birth rates could also shrink the GDP pie, as fewer workers produce goods while the number of consumers grows. This trend is reflected in the dependency ratio — the share of dependents (people under the age of 15 or over 64 years old) relative to the working-age population — which has increased across all major economies. In the US, the ratio rose from 51.2 dependents per 100 working-age individuals in 1990 to 54.5 last year.

  In the absence of a baby boom or greater openness to immigration, longer life spans would place additional strain on already overstretched social security and pension systems. The US Congressional Budget Office has already warned that the federal government would struggle to fund entitlement programs, such as Social Security, Medicare and Medicaid, by 2030.

  Making matters worse, the quality of the global workforce appears to be deteriorating, as the Organisation for Economic Co-operation and Development’s (OECD) 2022 Program for International Student Assessment (PISA) revealed sharp declines in mathematics, science and reading scores among students in major economies. The US ranked 34th in mathematics out of 81 countries — below the OECD average — after recording some of the lowest scores “ever measured by PISA.” In science, the US ranked 16th.

  Inequality — not just in income and wealth but also in access to quality education, healthcare and infrastructure — has long been recognized as a drag on economic growth. A 2017 study by the Economic Policy Institute, for example, showed that inequality reduced aggregate-demand growth by 2 to 4 percentage points of GDP per year between the late 1970s and 2012. Similarly, the OECD found that a three-point rise in the Gini coefficient — the average increase across OECD countries between 1985 and 2005 — would slow growth by 0.35 percentage points annually for 25 years, resulting in a cumulative GDP loss of 8.5 percent.

  Rising within-country inequality could be partly attributed to declining social mobility. In the US, studies have found that the likelihood of moving from a low-income household to a higher-income one has fallen by half over several decades. This decline helps explain people in the US’ discontent with globalization, given that its benefits have largely gone to investors and business owners rather than to workers.

  For the first time in decades, inequality between countries is also on the rise. According to an Oxfam report last year, the world’s top 81 billionaires are wealthier than the bottom 50 percent of the world population. Simultaneously, slower growth in lower-income countries has stalled economic convergence, widening global disparities.

  The COVID-19 pandemic accelerated these trends, pushing nearly 100 million people into extreme poverty. With access to energy and emerging technologies like AI becoming concentrated in developed countries, poorer economies risk falling even further behind.

  Natural resources — especially arable land, potable water, energy and rare-earth elements — are becoming increasingly scarce. Historically, technological innovation has mitigated such risks, but today’s geopolitical turmoil and economic fragmentation threaten to aggravate shortages, driving up commodity prices and fueling inflation.

  On the demand side, long-term forces like urbanization, global population growth and AI-related energy use would continue to drive the consumption of a broad range of commodities. However, as natural-resource commodities become scarcer, suppliers would have to turn to remote or politically unstable regions, implying higher costs and risks.

  It is important to bear in mind that resource supply chains are already fragile. China, for example, accounts for 60 percent of the world’s rare-earth production and nearly 90 percent of processing and refining, creating significant geopolitical vulnerabilities.

  Fossil fuels face similar dynamics, yet demand shows no signs of slowing. Global oil consumption currently amounts to about 100 million barrels per day. If the entire world population adopted the living standards of the average person in the US, daily consumption would skyrocket to 500 million barrels, based on US consumption levels last year — indicating that 4.2 percent of the world population accounts for 20 percent of oil consumption.

  Speeding up the transition to renewables could offer a possible solution, but strained government budgets and high capital costs continue to impede progress. The US$2 trillion spent on clean energy and infrastructure this year, though a historic milestone, falls far short of the US$5 trillion in annual spending needed to stave off climate catastrophe. With global warming on track to exceed 3?C by 2100 — double the 1.5?C target set by the 2015 Paris climate agreement — the need for decarbonization is undeniable, yet investments are not keeping pace.

  The unsustainable fiscal policies of the world’s largest economies, whose debt-servicing burdens weigh heavily on governments and private borrowers, threaten to erode living standards. By the end of this year, public debt is expected to hit US$100 trillion, or 93 percent of global GDP. Worryingly, the debt-to-GDP ratios of the US and the UK have already surpassed 100 percent.

  Furthermore, the US government now spends more on interest payments than on defense, and corporate, household, student, credit card and auto loans — each of which exceeds US$1 trillion — are being stalked by the specter of default. The federal deficit, projected to reach 7 percent of GDP this year, is nearly double the 50-year historical average of 3.7 percent.

  The US is not alone in this. Many developed economies are struggling with large fiscal deficits, creating a debt overhang that raises borrowing costs and dampens global growth prospects.

  The retreat from globalization threatens every pillar of the international economic order: trade, capital flows, immigration, and multilateralism. Trump’s proposed tariffs — including a 10 percent tariff on all imported goods and a 60 percent tariff on all Chinese imports — would likely accelerate this process by stoking inflation, disrupting global trade and undermining growth.

  To be sure, the fragmentation of global trade has been underway for years, at least since globalization peaked around 2007. While trade volumes have increased since then, growth remains relatively weak as governments worldwide impose tariffs, quotas and other barriers, renegotiate trade agreements, and divide into increasingly exclusive trading blocs.

  In today’s fractured world economy, capital flows are under increasing pressure. Amid escalating China-US tensions, US President Joe Biden’s administration imposed restrictions on investments in China’s tech sector. Consequently, US institutional investors allocate only a negligible share of their portfolios to China. According to the Congressional Research Service, American investors held US$322 billion in Chinese long-term securities last year — a 13.4 percent decline from 2022.

  The breakdown of the multilateral order is also intensifying migration pressures. Despite tightening immigration rules, Western countries have been unable to curb the flow of migrants. The number of forcibly displaced people surpassed 120 million this year — a record high — and with multiple conflicts raging around the world, that number is set to rise.

  Despite these risks, current global conditions present opportunities for investors, business leaders and policymakers, provided they allocate capital wisely, manage risks effectively and adhere to a few guiding principles.

  For starters, they must reassess their financial, operational and hiring practices. Consider, for example, the traditional “carry trade,” whereby investors raise capital at low interest rates in markets such as London or New York, and invest in higher-yielding assets in countries like Brazil, repatriating the returns as dividends. This strategy, which was well-suited to a globalized economy, would not work as effectively in a more fragmented financial landscape.

  Similarly, decentralized, transnational supply chains and procurement work well in a fully globalized world. However, as the pandemic demonstrated, this model could unravel rapidly in a deglobalizing economy.

  Moreover, corporations now find themselves operating in an era of increased government intervention, with stricter regulations, expanded welfare programs, higher taxes and industrial policies. As a result, the private sector would likely shrink.

  This shift is already well underway. Since 1996, the number of publicly traded companies in the US has fallen from 7,000 to 3,500. There are multiple explanations for this — ranging from a surge in corporate mergers to firms avoiding the regulatory burdens of public ownership — but the result is the same: A reduction in the breadth and depth of capital markets, which threatens to curtail investment and hamper economic growth.

  That said, the twin super cycles of AI and the energy transition could counter these headwinds and revitalize the global economy. In the meantime, decision-makers must remain vigilant and focus on generating meaningful returns by strategically allocating capital, identifying investable projects and deploying resources effectively.

  However, if these trends persist, the global economy would continue to sputter, and the double-digit growth rates of the late twentieth century would recede further into memory. Prolonged stagnation could lead to declining living standards, heightening the risk of sociopolitical upheaval.

  Dambisa Moyo, an international economist, is the author of four New York Times bestselling books, including Edge of Chaos: Why Democracy Is Failing to Deliver Economic Growth — and How to Fix It.

  Copyright: Project Syndicate
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