20160225-DBS_Group-Global_growth_what_is_potential_and_where_is_it_going__21页_323kb

Global Growth: Potential and Future Trends

Core Content

This report from DBS Group Research, dated 25 February 2016, discusses the current and future trajectory of global economic growth, emphasizing that the slowdown is structural and not a temporary crisis. The focus is on how productivity growth and demographic changes, particularly the falling working-age population growth, are driving the long-term decline in growth potential.

Main Points

• Global Growth is Not in Crisis: Markets and central banks are overly concerned about a "growth crisis," but the report argues that current growth rates are actually above or at potential in the US, Japan, and Europe, and nearly at potential in Asia.

• Demographic Challenges:

  • Falling working-age population growth is the key driver of slower potential growth.
  • Population aging is reducing the number of workers, which in turn reduces economic output and investment.
  • In the Asia-10 group, potential growth is expected to fall from 6.3% (current) to 5.2% by 2025.
  • China's potential growth is expected to drop from 6.4% to 4.9% by 2025.
  • Japan has a current potential growth of 0.5%, while the US is at 1.9% and will fall to 1.6% by 2025.
  • Korea and Singapore are also experiencing sharp declines in working-age population growth, with potential GDP growth falling to 2.8% and 1.2%, respectively, by 2025.

• Productivity Growth:

  • Productivity growth has historically been a major contributor to GDP growth, especially in Asia.
  • As incomes rise, productivity growth slows, which is a natural part of development.
  • Asia-10 economies are expected to see a significant drop in productivity growth over the coming decades, contributing to slower GDP growth.
  • In high-income countries, productivity growth is expected to fall below 1.5%, which is the long-run average for developed economies.

• Asia's Growth Outlook:

  • Asia's growth is still stronger than the G3 (US, Japan, EU4), with a 4x faster growth rate.
  • Even with slower growth, Asia continues to outperform the G3 in terms of GDP creation.
  • By 2025, Asia will create an entire Germany every 2.2 years, demonstrating its continued economic power despite the slowdown.

• Growth Volatility:

  • Lower-income countries experience greater volatility in growth.
  • India is an exception, as its demographic profile still supports growth, though it is not performing at its potential.

Key Information

• Growth is slowing, not flatlining: The report argues that growth is structurally declining, not just due to economic downturns but also due to rising incomes and aging populations.

• Slow is the new fast: While growth is slowing, it is still above the potential in most major economies, and the G3 is growing faster than its potential.

• Asia's Role: Asia remains the fastest-growing region globally, even as growth slows. It is expected to continue creating significant economic value, despite the demographic challenges.

Structural Growth Components

• Potential GDP Growth = Productivity Growth + Working Age Population Growth
• In China, potential GDP growth is expected to fall from 6.4% to 4.9% by 2025.
• In Japan, potential GDP growth is 0.5% today, and it will fall to negative in the long run.
• In the US, potential GDP growth is expected to fall from 1.9% to 1.6% by 2025.
• In Korea, potential GDP growth will fall from 4% to 1.5% by 2025.
• In Singapore, potential GDP growth will fall from 4% to 1.2% by 2025.

Conclusion

• Asia's Growth is Sustainable: Despite the slowdown, Asia will continue to be a major engine of global growth, creating entire Germanys every 2.2 years by 2025.
• Investment Strategy: The report suggests that investors should consider their risk/reward profile when choosing countries in Asia, as growth rates vary widely across the region.
• No Crisis, Just a New Normal: The report concludes that the global growth slowdown is structural, not cyclical, and that slow is the new fast in the developed world.