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The Long-term Challenges to Global Economic Growth

by MK Khoo, 19 May 2016

How did the world do in the last half-century? And, where will we go from here?

According to a McKinsey report1 published in 2015, the world economy expanded six-fold and the average per capita income tripled over the last 50 years. However, in the midst of this unprecedented economic boom, global employment growth had been slowing for the last 20 years. Based on McKinsey's forecast, global employee headcount will likely begin to shrink starting from 2024.This development can be attributed partly to population ageing. 

In 2015, global population of aged 60 and above was 901million making up 12% of total population2. By 2050, all major geographical regions, except Africa, will have close to a quarter of their population aged 60 years or over. For Europe, the challenge is not just an ageing population but a shrinking one. To counter this long-term structural trend of declining labour participation, policy makers may have to look at ways to improve employment opportunities for women, young people and those aged above 65.

The burden of an ageing labour force will manifest in several ways - lower productivity, falling aggregate demand and rising health and pension costs. The latter is inextricably linked to longer life span. Taking the world as a whole, life expectancy at birth is projected to rise from 70 years in 2010-2015 to 77 years in 2045-20502.

Turning to the subject of labour productivity, The Conference Board in its Productivity Brief 20153 highlighted that global labour productivity was 2.1% in 2014 compared to the pre-crisis average of 2.6% (1999-2006).

A more dramatic deterioration can be seen in the growth rate of total factor productivity (TFP), i.e. the productivity of labour and capital together. Using The Conference Board Total Economy Database, TFP has been hovering around zero for three years in a row compared to an average of over 1% from 1999-2006 and 0.5% from 2007-2012. Going forward, declining TFP will likely undermine corporate profitability and wage growth.

In the near-term, the world has yet to achieve a self-sustaining momentum in aggregate demand growth even with years of monetary and fiscal stimulus by major economies since the 2008 crisis. The latest 2016 global growth projection by the World Bank is 2.5%, a revision downward from 2.9% made in January.

For the longer-term, successful policy responses to deal with an ageing population (and a shrinking one), declining labour participation rate and stalled productivity growth will have a heavy impact on future global living standard and income equality. One thing for sure, the next half century will be anything but like the last half. Besides technology, which is much touted to be the game changer in every aspect of our lives, attention to demographic shifts and socio-economic indicators are warranted as the world embraces growth and development in the next 50 years.

1. Can long-term global growth be saved? McKinsey Global Institute January 2015

2. United Nations World Population Prospect. The 2015 Revision

3. The Conference Board Productivity Brief 2015


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