1 August 2019

The Ten Key Economic Trends of the 21st Century (So Far)

Last week we looked back on the ten most important and influential geopolitical events and trends of the first two decades of this century. Now, we will take a look at the ten most important economic trends that have defined the 21st century thus far. Clearly, the first two decades of this century have been a time of dramatic economic change.  This is evident in the new balance of power within the global economy, with the center of gravity for the global economy shifting from a Western-dominated system to one in which Asia is once again hugely influential.  Likewise, a good deal economic power has shifted from the developed world to emerging markets over the past 20 years.  Meanwhile, a number of factors are playing a key role in shaping the economy of today, from changes in wealth distribution to new technologies.  In addition, politics is playing a major role in today’s global economy, both as a result of these aforementioned changes and as a cause of some of the more recent trends that have emerged around the world.

There are many economic trends that have been highly influential in the 21st century so far, but here we have narrowed them down to ten.  These include: 

  • Slower Growth in Developed Economies: Despite a moderate recovery in recent years, economic growth rates in nearly all of the world’s leading developed economies have been much lower during the first two decades of the 21st century than over the entire second half of the 20th century.  From the 1950s to the 1970s, developed economies expanded by an average of more than 4%.  In the 1980s and 1990s, these economies recorded average annual growth of 3%, a decline of 25% from previous levels.  Since 2000, developed economies have grown by less than 2% per year, an ever greater slowdown.  Some of this is the result of demographics, as population growth has slowed in most developed economies, leading to reduced growth in both the size of consumer markets and the size of the labor force in developed economies.  Likewise, the opening of the global economy has resulted in a severe loss of competitiveness for most developed economies, particularly those that are weak in high-tech and high-growth sectors of the economy.
  • The Emergence of Emerging Economies: The integration of so many emerging markets into the global economy in the 1980s and 1990s has resulted in a dramatic transfer of economic power to emerging markets in the 21st century.  Much of this is the result of the transfer of many types of manufacturing activities from high-cost developed economies to low-cost emerging markets, led by China. In turn, this shift in manufacturing has led to rising wages in many emerging markets, enabling them to develop consumer markets of their own, thus advancing their own level of economic development.  So far this century, emerging markets as a whole have grown by more than 5% per year, a rate well above that of developed economies during this period.  As a result, emerging markets now account for more than half of the additional economic output that is generated around the world.
  • The Return of Asia: Together with this shift in economic power to emerging markets is a geographic shift in economic power as Asia is returning to the forefront of the global economy for the first time since the Industrial Revolution.  This began with Japan’s economic transformation after the Second World War, before spreading to other areas of East Asia.  Over the first two decades of this century, it has been China that has benefitted from its economic reforms in the 1980s to now play an increasingly important role in the global economy.  Next in line could in India, whose population is nearly the equal of China but whose economy remains far less developed.  Either way, Asia now accounts for one-third of total global economic output, a share that is forecast to continue to rise in the coming years.
  • Localization: In the early part of this century, it was assumed that globalization was here to stay and that the pace of globalization would continue to accelerate as the integration of the global economy became more entrenched.  Instead, a new trend towards localization suggests that globalization may already have peaked.  In short, localization is the shift in the production of goods, or the provision of services, closer to the location of their end users.  This has been triggered by many factors, including fears of trade dislocation and concerns about environmental issues.  For larger developed economies that have seen their manufacturing industries move to emerging markets, this could signal the start of an economic revival.  For poorer countries that were hoping to emulate China’s export-driven economic miracle, this could be very bad news.
  • Labor Shortages: While manufacturing operations may be relocated as a result of localization, in many cases it is moving to locations where there are not enough workers.  This is due to the fact that, in most of the world’s largest economies, working-age populations are either stagnating or are already in decline.  In many areas of Europe and East Asia, dramatically low birth rates were already in place in the final decades of the 20th century, leading to today’s labor shortages in many countries in those regions.  However, birth rates are now falling in most other economic centers, including North America, leading to much lower growth rates for working-age populations in those economies.  This has played a role in the remarkably low unemployment rates recorded in countries such as Japan (2.4%), Germany (3.1%) and the United States (3.7%).  Without an available labor force, businesses will be forced to turn to automation to maintain their productivity, a trend that could come to dominate many sectors of the economy in the years ahead.
  • Aging Markets: While working-age populations around the world are stagnant or shrinking, the world’s elderly population is soaring, providing the most certain growth market for businesses and investors.  Today, countries where more than 20% of the population is over the age of 65 include major economies such as Japan, Italy, Germany and France.  By the year 2050, there will be nearly 1.6 billion people on the planet over the age of 65, an increase of 900 million from the number of over-65s today.  With this market guaranteed to grow in the years and decades to come, it is certain that businesses will develop new goods and services to meet the demands of this segment of the market.  
  • Technological Change: Without a question, the pace of technological change continues to accelerate, something that has had a major impact on the economy this century.  In fact, we are now in the midst of a tech arms race, one between companies as well as one between countries.  There are many examples of how technological change is impacting the global economy in the 21st century.  Digitalization is changing how businesses work today, and giving a competitive advantage to those economies that can adopt this new technology. Artificial intelligence is another technology that is quickly having an impact on the global economy, with the world’s two leading economies, the United States and China, engaged in a battle to lead this technology.  Communications are another area of technological change that has had a massive impact on the global economy in recent decades.  Altogether, the 21st century has already witnessed many dramatic technological changes, but so far, these have not produced significantly higher levels of economic growth.
  • Rising Debt: One of the dominant economic issues of the 21st century thus far has been debt.  In fact, it was debt, both in the public and private sector, that led to, and exacerbated, the global financial crisis that began in late 2007.  Since the financial crisis, most major economies took significant steps to bring debt under control, or at least to keep it from rising as it was before the financial crisis.  However, there has been too much focus today on public sector debt that, while still quite high in some cases, is largely under control.  Instead, the new threat is coming from private sector debt that is held by banks, businesses and consumers, as in many cases, this type of debt has continued to rise to dangerous heights in many countries. Nowhere is this more evident than in China, where by some estimates, debt held by banks, businesses and consumers is now nearly three times the size of that country’s GDP.
  • Protectionism: The issue that is impacting the global economy right now more than any other is protectionism.  At the start of this century, protectionism appeared to be a threat from the past, as globalization was sweeping all before it. However, protectionism has been on the rise as anti-globalization sentiment has been growing.  In fact, this has become a very important theme in elections all around the world in recent years, resulting in governments that are now increasingly backing protectionist measures.  A perfect example of this is the ongoing trade war between the United States and China, a dispute that has harmed global trade in recent years.  Of course, smaller export-dependent countries are desperate to stop the spread of protectionist sentiment and the rise of trade barriers, but their efforts thus far have done little to achieve this goal.  In fact, the next few years could prove to be a decisive moment in global economic history as the future of international trade and investment will be at stake as governments make some critical decisions on this issue.
  • Environmental Awareness: Of all of the issues that have impacted the global economy so far this century, none has the potential to have a greater impact on the global economy over the remaining eight decades of this century than environmental change.  Over the past few years, global awareness of climate change and other environmental issues has grown remarkably, thanks in part to the wild weather conditions and events that we have witnessed over the past 20 years. Already, we have seen the rise of entirely new industries thanks to the changing climate and fears of what this could mean for humanity’s future.  While these represent opportunities for economic growth, the predominant concern is that the changing economy could be accompanied by vast economic dislocations, some of which could devastate the global economy.  

Once again, the interesting question is whether or not these economic issues and trends were predictable.  As we entered the 21st century, the global economy was expected to be entering a period of strong growth following the ups and downs of the 1990s.  In developed economies, growth averaged 3.2% over the final six years of the 1990s, a level that was just below that of emerging markets during that period.  However, these two groups of economies would diverge greatly, with emerging markets growing three times faster than developed economies (5.7% to 1.9% per year) so far in the 21st century.  Given the integration of emerging markets into the global economy over the final two decades of the 20th century, it was clear that growth in this group of economies was set to take off.  Likewise, some other issues were also predictable, particularly those involving demographic and environmental change.  In contrast, there were some surprises in the 21st century, including the financial crisis (which very few economists predicted) and some of the technological changes that have taken place in recent years that would seem fanciful for people just a couple of decades ago.

As we look forward to the next two decades of the 21st century, it is clear that they will be decisive in determining the direction of the global economy for a long time to come. For example, it will be interesting to see if developed economies can stem what appears to be an inevitable deceleration of economic growth, or if productivity gains can be achieved that will allow growth to pick up again.  Likewise, emerging markets expect to play an ever-greater role in the global economy in the coming years, but will this be limited to those in Asia given the struggles of so many emerging markets outside of that region in recent years. Meanwhile, we can expect technology and the environment to continue to bring major changes to the global economy over the next two decades, some of which might be hard to foresee at the present time.  Altogether, the next 20 years are likely to be as eventful as the past 20 years, and while the general direction of the global economy is likely not so hard to predict, there will nevertheless be a number of surprises that could either improve the outlook for the economy or cause more hardships.