In a world of economic debates centered on whether interest rates will change in one quarter or another, driven by the latest piece of labor-market data or central bank pronouncement, thinking can become very short-term in nature. This is a pity since it overlooks the fact that the world economy will likely undergo huge changes in the decades ahead – and that these changes could have important implications for investors. The developments will be many, but let us consider just four for now.
First, the composition of global gross domestic product (GDP) is likely to change substantially. Given their higher growth rates, activity appears set to move towards countries outside the Organisation for Economic Co-operation and Development (OECD) group of advanced economies, particularly those in Asia. The combined GDP of China and India, for example, is forecast to rise from 33% of the OECD level in 2010 to 73% by 2060. And having accounted for nearly a quarter of global GDP at the beginning of the century, Asia’s share is expected to stabilize at around 45% by the 2050s. This is reflected in the ranking of the top five countries by GDP by 2060, on the OECD’s projections: China, United States, India, Japan and Indonesia (with China leapfrogging the U.S. and Indonesia, currently ranked 15th, replacing Germany).
Second, countries in similar economic positions at present may experience contrasting fortunes on a longer-term horizon. Differences in labor efficiency and employment participation, capital intensity and access to education can all influence country outcomes. South Korea, for example, is projected to gain most in terms of GDP per head on the OECD’s ranking by 2030, rising from 20th to 15th. This performance is mainly due to economic momentum built up as a result of improving labor efficiency and gains in human capital – the economic value of the population’s skills, knowledge and experience. In contrast, Italy and Portugal are among those projected to slip down the ranking tables, given inertia from historically low labor efficiency and higher capital costs incurred during the Eurozone[1] crisis.
Third, we believe the implications of the advanced economies’ “demographic time bomb” are overblown since some of the challenges from ageing populations may be offset by greater labor-market participation. Over the next 25 years, this could be achieved in most OECD countries through already legislated increases in pensionable age, the positive effects of increased education and established trends in female participation. Beyond 2030, however, further measures may be needed to ensure that retirement ages are keeping pace with trends in life expectancy.
Finally, debate over the path of long-term interest rates tends to focus on “renormalization” of borrowing costs from current, exceptionally low, levels over the next three to five years. Looking a little further ahead, pressure on public finances in the advanced economies and the rise of high-saving, non-OECD countries suggest that the underlying trend is unlikely to be sharply upwards. Beyond 2030, however, the rise of high-saving countries relative to others could be outweighed by an anticipated decline in savings rates in all countries, as populations age; and by the 2050s, the OECD expects a global saving shortage to put stronger upward pressure on global interest rates.
What are the messages for investors from such horizon gazing? First and foremost, these outcomes hinge on huge uncertainties. Long-term views on global saving and interest-rate trends are highly sensitive to future developments in China and India since they account for more than one-third of global saving in aggregate. Indeed, the sheer economic size of these countries means that making correct economic “calls” on them – no small challenge – is fundamental to meaningful long-term forecasting.
Our horizon gazing does highlight a number of potential economic and market opportunities though. On the OECD’s reckoning, for example, a faster-than-expected pace of regulatory reform could increase GDP in non-OECD countries by an average of 9% by 2030, and in the most restrictive advanced economies by 6% in the same period. Addressing structural labor-market rigidities in the developed economies could also produce substantial gains. Other areas of potential gain include the benefits of improving access to education in the emerging markets, which could raise levels of GDP in China, India, Indonesia and South Africa by at least 10% - though such gains would inevitably take time to materialize. Whatever the uncertainties, these potential shifts in global economic power suggest that the world will become a very different place over the next four or five decades. Acknowledging that such change may happen, rather than simply assuming that the current status quo will prevail, could provide long-term investors with a welcome edge.

Lucy O’Carroll is Chief Economist in the Investment Solutions team. Lucy joined Aberdeen following the SWIP acquisitions in April 2014, and is responsible for leading all aspects of the analysis of global economic developments and prospects, with particular focus on their impact on growth, inflation, interest rates and bond yields.

Before its acquisition by Aberdeen, Lucy transferred to SWIP in February 2012 from Lloyds Banking Group, where she had spent three years as a Senior Economist. In this role, Lucy was responsible for forecasts, analysis and strategic advice to the Wholesale Bank. She also provided the Group with detailed economic analysis of the Eurozone crisis. Prior to this, Lucy was Senior Research Director at HBOS Treasury Services for four years. She has also held other senior roles at RBS and the Bank of England, where she worked for the Monetary Policy Committee, and spent two years lecturing in the University of Manchester’s School of Economics.

Lucy has a PhD in Economics from the University of Manchester.