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A decade: past and future

Over the past 10 years the world economy has gradually recovered from the Global Financial Crisis (GFC), growing by a respectable annual average of 3.8% from 2010 to 2019.

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Kevin Lings

Kevin Lings

Chief Economist

BCom(Hons)(Economics)

Kevin joined then-Liberty Asset Management as an economic analyst in 2001. As STANLIB’s Chief Economist, he is responsible for domestic and global economic research and forecasts. Kevin also provides input into STANLIB’s asset allocation processes and provides relevant economic research for our Fixed Income, Property and Equity teams.

  • Economies the world over will be impacted by five key trends in the next decade.
  • Prosperity depends on the ability of society to adapt timeously to the changes.
  • South Africa’s most urgent challenge is meaningful and sustained economic growth that supports employment.
  • Visit STANLIB’s News & Insights page for more articles.

Gradual recovery over the past decade

This compares favourably with an average of 4.2% in the 10 years before the GFC.

 

In large part, this recovery has been fuelled by ultra-loose and unconventional monetary policy, especially within developed economies. This included the introduction of record-low interest rates as well as extensive use of asset purchases (quantitative easing) by the major central banks.

 

Unfortunately, this over-reliance on unconventional monetary policy appears to have distorted the global allocation of capital, with many banks becoming less focused on granting credit, and instead prioritising activities that boost fee income, including trading financial market instruments. Reducing the financial market’s reliance on cheap capital will be one of the key challenges facing monetary and fiscal authorities over the next 10 years. 

In the past 10 years, the recovery has been somewhat uneven across the key regions

For example, the US achieved average annual growth of 2.3%, while the Euro-area expanded at an average of only 1.5%, hurt by a return to recession conditions in 2012/2013, partly as a result of the implementation of excessive fiscal austerity.


In China, the impact of the GFC was partly offset by a large, government-initiated fiscal and credit stimulus programme. Real GDP growth fell from 14.2% in 2007 to 6.3% in 2018/2019 and averaged 7.6% over the 10-year period. The cost of the Chinese government stimulus was an excessive rise in debt, especially within state-owned enterprises (SOEs). This is now limiting the government’s ability to respond to any further economic slowdown.


Over the next 10 years, the policy authorities will be occupied largely with reducing the debt of Chinese SOEs while rebalancing economic growth away from an over-reliance on fixed investment and industrial production and in favour of household consumption, and the development of the services sector.


In contrast with global trends, most of South Africa’s key economic indicators have systematically weakened over the past 10 years. This includes: GDP growth, which has averaged only 1.7% since 2010 and a mere 0.8% in the past five years; falling GDP per capita as population growth outpaces GDP growth; rising levels of unemployment (especially youth unemployment); dramatically higher public sector debt; worsening tax collection; falling confidence levels; slowing private sector fixed investment activity; declining infrastructural capacity, especially electricity and water; record low domestic savings; and diminished credit ratings.


The country’s economic deterioration has become self-reinforcing. The lack of economic growth and job creation has undermined confidence, which has dampened private sector fixed investment spending, household consumption and tax collection, and this has resulted in rising unemployment, which has then led to a further fall-off in confidence. Breaking this self-reinforcing cycle is critical to an economic revival, especially if the global economic environment is becoming more challenging.

 
The South African economy, and by implication the policy authorities, will face many domestic socio-economic challenges over the next 10 years. These include the need to overcome the country’s ailing infrastructure to encourage business investment; the successful prosecution of people involved in state capture to restore credibility in public sector institutions; the systematic improvement in education outcomes to improve the country’s competitiveness; the broadening-out of healthcare services to systematically improve life expectancy; and the successful redistribution of available land to more fully address the legacy of apartheid. However, the overarching and most urgent challenge will be to ensure a meaningful and sustained pick-up in economic growth that is sufficient to lead to a widespread increase in employment. Without an increase in employment, the socio-economic environment will continue to deteriorate, government finances will weaken further, and the risk of a widespread social backlash will rise.


Powerful trends ahead

Although each country will face its own set of challenges over the next 10 years, there are several trends that appear powerful enough to meaningfully impact most economies, including South Africa. These trends will force businesses, households and governments to alter the way they function and engage with society in order to remain relevant and effective.


The first trend is that, from a policy perspective, there is less scope for countries to rely on conventional monetary and fiscal policies to stimulate their economies. The interest rate in most major developed economies is close to zero, making further rate cuts impractical. At the same time, government debt has become excessive, limiting the scope for further government spending to boost growth.


With an ageing population, the demand for more social spending will rise, making tax cuts highly problematic. Countries will have to expand their toolkits, focusing increasingly on policy areas that have been somewhat neglected. These include the role of competition policy; the impact of business regulation; the usefulness of labour laws; the effectiveness of trade policy; and the value of private-public partnerships. This will require a greater focus on making it easier to innovate as well as finding a balance between technology integration and human capital investments. It should also encourage governments to focus not only on the speed of growth, but also the quality of growth.
 
The second major trend is climate change. The world’s population is likely to increase by around one billion over the next decade, placing enormous strain on the planet’s finite resources and exacerbating global warming, pushing temperatures beyond a tipping point that will have devastating economic, social and political consequences. Companies and governments will have to divert significantly more resources into dealing with both the impact of climate change as well as products and services that help to reduce carbon emissions.


The third key trend is the increasing use of robots and automation. This is likely to have an enormous impact on shaping employment and entrepreneurial opportunities. Research from the World Economic Forum estimates that by 2035, only about 50% of tasks across a wide range of industries will still be carried out by humans. Furthermore, it is conceivable that by 2029 artificial intelligence may reach a level of sophistication that, in many respects, is similar to humans. Under these circumstances, investing in people becomes a fundamental building block of growth and economic resilience.
 
During the next decade, it is likely that another three billion people will gain online access, with the number of devices connected to the internet reaching 500 billion. It is estimated that by then, people will be interacting with connected devices on average at least every 18 seconds compared to around every six minutes today. That means an average interaction with a connectable device 4 800 times per day. To provide for this type of connectivity, 6G may be necessary by 2029 as 5G reaches full capacity.


While all of this may sound like exponential progress, it will be accompanied by a unique set of challenges. These include the likely increase in cybercrime; the risk that vast amounts of information become highly concentrated; disruptions to many existing industries; and challenges on how to effectively regulate the cyber industry.


The fourth critical trend is the impact of ageing populations, especially in the major developed economies. For example, since 2010 the number of people younger than 25 living in Japan has fallen by 2.7 million. At the same time, life expectancy has risen to 84 years, which gives Japan a World Life Expectancy ranking of 1. Meanwhile in the United States people over the age of 70 years have experienced the fastest increase in employment when compared with all other age groups since 2010. Furthermore, the percentage of the US population aged 65 or older has risen from 12.3% in 2005 to 16.2% in 2019.
 
The changing demographics have significant implications for most components of the economy, including the nature of consumer spending, the provision of healthcare, and the role of the retirement industry. In contrast, South Africa has a very young population (average age of around 25), there are 1.2 million children who start school every year and the country has a life expectancy of below 65, giving South Africa a World Life Expectancy ranking of 153. All of these have implications for the nature of consumer spending and industrial development.


Finally, the rise of nationalism and trade protection could intensify. During the decade prior to the onset of the GFC, global trade grew at an annual average of 6.4%, corresponding with a relatively prosperous phase for the world economy.


However, in the decade after the GFC, global trade growth slowed to an annual 3.8%, reflecting increasing global trade protection, which has intensified since the election of US President Trump and the UK’s vote for Brexit. The trade dispute between the United States and China has led to global trade going back into recession for the first time since the GFC. The weakness in global trade has also undermined world industrial production, leading to a slump in business confidence. Clearly, nobody will ‘win’ the trade war, instead the world’s inter-connectivity simply means most economies will be negatively impacted to some extent, forcing economic participants to look inward for growth and investment opportunities. Adaption is key.


So in conclusion, these five key trends will have a profound impact on economies everywhere. For countries to prosper, households, businesses and governments will need to adapt to these
changes.

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