What will really happen in the next decade?
Earlier this year, the Chinese People’s Congress was told the growth target would be 7% but that “deep-seated problems in the country’s economy are becoming more obvious.” Since then, predicted growth rates have dropped considerably. McKinsey Institute authors Luis Enriquez, Sven Smit and Jonathan Ablett have produced four economic scenarios for the next 10 years, ranging from high to stalled growth, in a paper, Shifting Tides. They explain the three main sets of forces at work and how policy responses will dictate various outcomes. The first set is today’s economic stimulus policies and the shifting energy markets. The next set of forces are more underlying and less immediate – the demographic effects of urbanisation and ageing. Finally, there are technological innovation and global connectivity, both of which are uncertain and variable in their effects. The first set of forces are most obvious in the lack of economic demand despite the stimulation of low interest rates from loose monetary and fiscal policies, as well as low oil prices. The next forces produce longer-term issues, such as rising debt loads, ageing populations, reduced workforces and inadequate or outmoded infrastructure. The third forces of technological innovation and globalisation have resulted in a divergence rather than a convergence of the world’s major economies. Overcoming weak demand The International Monetary Fund estimates that production in the 10 largest advanced economies was 2% below potential in 2014. Many governments and central banks responded with fiscal and monetary stimulus programmes that fostered the low real-interest-rate environments that have endured for over five years. As a result, all increased rather than reduced their overall debt levels – in some cases, by more than 50%. Persistently low interest rates encourage investors to search for yield and safety, creating the preconditions for asset bubbles and further volatility in international financial […]
