Slower Global Economic Growth is Here to Stay
There is no question that the global economy is in the midst of a period of relatively sluggish growth, with global economic growth averaging just 3.2% over the past eight years. Much of this slowdown has been the result of the global financial crisis and its impact on the world’s developed economies, many of which have fallen on hard times over the past eight years. Now, many of the world’s leading emerging markets are also in the midst of a severe economic slowdown, preventing the tentative recovery in many developed economies from boosting the overall level of global economic growth. In fact, outside of Asia, most emerging markets are contributing almost nothing to global economic growth. Moreover, the outlook for the coming years calls for growth rates to remain very close to where they have been in recent years. As expectations for growth are being tempered around the world, there are major implications for global stability and the well-being of the international economy.
The fall of Communism and the re-connection of most of the world’s largest emerging markets to the global economy in the 1980s and early 1990s lead to a surge in economic growth in the following years. Between 1994 and 2007, the global economy grew by an average of 4.0% per year, with growth peaking at 5.7% in 2007, just before the onset of the global financial crisis. While developed economies grew by 2.8% between 1994 and 2007, emerging markets soared, with growth averaging a stunning 7.7% between 2003 and 2007 as investment flowed into these markets and exports flowed back to developed markets in North America, Europe and East Asia. However, the global financial crisis brought an end to these glory days, dramatically reducing economic growth rates around the world. In fact, since 2008, developed economies have grown by an average of just 1.0% per year. Moreover, emerging market growth has also slowed to an annual average of 5.2% per year, as growth in China has been cut in half and emerging markets such as Russia and Brazil have fallen into deep recessions.
There are a number of reasons for the fact that global economic growth rates appear to be stuck at around 3% per year. First, the global financial crisis led to a severe decline in business, consumer and investor confidence that lingers to this day, resulting in lower levels of international trade and investment. This led to lower consumer demand in developed economies and lower levels of much-needed foreign investment in emerging markets. Second, the impact of long-term demographic trends has begun to be felt around the world, with declining working- age populations holding back growth in key economies such as Japan, China and Europe, while reducing the growth potential of many leading economies. Meanwhile, the growth stimulus provided by the re-entry of China, India, Russia and dozens of other emerging markets into the global economy has shrunk in recent years as many of these economies have reached middle-income status, thus reducing their growth potential. Finally, productivity growth levels have been much lower than expected throughout the world in recent years, and it is productivity that will have to play a greater role in driving growth in the coming years.
With global economic growth rates forecast not to rise significantly in the coming years, there will be many major implications for the global economy as well as for international stability. First, developed economies, particularly those with less favorable demographic situations such as Japan and southern Europe, will continue to lose power and influence to faster-growing, more dynamic emerging markets, mainly in Asia. Even faster-growing developed economies such as North America and Australia will face greater competition from these emerging markets. Meanwhile, a combination of sluggish economic growth and the continued reduction in the number of low-skilled manufacturing and agricultural jobs will leave vast numbers of lower-skilled workers without a role in the 21st century economy. This, in turn, will lead to more political unrest around the world and will raise the threat of protectionism and extremism, two factors that could derail the global economy in the years ahead. With economic growth rates failing to return to their pre-crisis highs, and with political risk levels rising, the next few years could prove to be very volatile indeed, thanks in large part to the sluggish global economy.