Has the world economy reached peak growth?

At the start of a new decade, many commentators are understandably focused on the health of the global economy. This upcoming decade gross domestic product (GDP) growth will likely be lower than during the last decade, barring a notable improvement in productivity in the West and China, or a sustained acceleration in India and the largest African economies.

The global GDP growth for the 2010-2019 decade will likely be around 3.5 percent per year – though until we have the final fourth-quarter data for 2019, we won’t be able to calculate.

This average GDP means that many countries fell short of their potential. In principle, global GDP could have increased by more than 4 percent, judging by the two key drivers of growth: the size of the workforce and productivity. In fact, the 2010s could have been the strongest decade of the first half of this century. But it didn’t turn out that way. The European Union endured a disappointing period of weakness, and Brazil and Russia each grew by much less than in the previous decade.

The prospects for the coming decades are even less strong. China’s labor-force growth is now peaking, and the populations of Japan, Germany, Italy, and other key countries are aging and in decline. True, some countries and regions that underperformed in the teens could now catch up; but much will depend on the realization of several positive developments.

Given the EU’s demographics, it would take a significant improvement in productivity to boost the rate of GDP growth. More expansionary fiscal policies in many countries could produce a temporary acceleration this year and perhaps through 2021. But it is hard to see how a stimulus-driven expansion could be sustained much beyond that point. Europeans can talk all they want about “structural reform.” But without effective productivity-enhancing measures, the EU’s growth potential will remain in decline.

As for Brazil and Russia, it would be highly disappointing if both countries were to register the same weak growth of the past decade. Yet, to achieve 3.5-4 percent annual growth from around the current 1 percent annual growth would probably require another commodity-price boom, in addition to major productivity enhancements. Given that both countries tend to eschew reform whenever commodity prices are booming – a classic symptom of the “commodities curse” – it is doubtful that either will reach its potential this decade.

In China, a further deceleration in trend GDP growth is highly likely, owing to demographic realities. In light of China’s investments in technology and shift to more domestic consumption, productivity certainly could improve. But whether that will be enough to overcome China’s other well-known challenges remains to be seen.

For its part, the United Kingdom could achieve stronger growth this decade, but it could also suffer a slowdown, depending on how it deals with Brexit and its aftermath. In any case, the country’s influence on global GDP is likely to be modest.

Then there is the United States, where annual growth potential appears to be just over 2 percent. Without more fiscal stimulus and an indefinite continuation of ultra-easy monetary policies, it is difficult to see how the US could exceed this rate. Moreover, it has been more than a decade since the US experienced a recession. Were that to happen in the months or years ahead, the US would have an even smaller chance of reaching its growth potential for the 2020s.

Last but not least are the still-smaller economies with enormous growth potential. While countries such as Indonesia - and perhaps Mexico and Turkey - are becoming more relevant in an assessment of global GDP, it is India that promises to have the largest influence in the 2020s and beyond. The country’s demographics will remain in an economic sweet spot for at least another decade.

Were the Indian government to adopt the right mix of growth-enhancing reforms, it could easily achieve annual growth in the range of 8-10 percent. And, because India is already close to being the world’s fifth-largest economy, that would have a significant influence on global GDP growth. The problem, of course, is that the current government has shown no indication that it will pursue positive reforms. On the contrary, it has launched a debilitating new culture war.

That leaves Africa. As matters stand, no African economy is large enough to influence global GDP on its own. But, as a region, Africa’s GDP is close to that of India, which means that if enough of its major economies can achieve strong growth, the effects will be felt more broadly. The rise of Africa seems both desirable and inevitable to me. Whether the continent can drive global GDP growth will be a key question for the coming decade.

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Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former UK Treasury Minister, is Chair of Chatham House.

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Last Update: Wednesday, 20 May 2020 KSA 10:05 - GMT 07:05
Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.
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