COVID legacy will be higher debt, not weaker growth - Capital Economics
The Long Run

COVID legacy will be higher debt, not weaker growth

Long Run Economic Outlook
Written by Global Economics Team

We do not expect the pandemic to do permanent damage to global economic growth as vaccines allow activity to resume. There will be sustained behavioural changes, but these need not be negative. Note, for example, that technology use has accelerated in many advanced economies, supporting our view that future productivity growth will be stronger than most expect. Another key legacy will be higher public debt, but we expect this to be managed through sustained low interest rates and by central banks tolerating a significant rise in inflation. The increased pushback against globalisation has strengthened our conviction that EM catch-up will slow. Meanwhile, the green energy intensive fiscal stimulus around the world has brought forward the likely timing of peak oil demand, which will weigh on oil prices and see some EMs struggling to diversify.

  • We do not expect the pandemic to do permanent damage to global economic growth as vaccines allow activity to resume. There will be sustained behavioural changes, but these need not be negative. Note, for example, that technology use has accelerated in many advanced economies, supporting our view that future productivity growth will be stronger than most expect. Another key legacy will be higher public debt, but we expect this to be managed through sustained low interest rates and by central banks tolerating a significant rise in inflation. The increased pushback against globalisation has strengthened our conviction that EM catch-up will slow. Meanwhile, the green energy intensive fiscal stimulus around the world has brought forward the likely timing of peak oil demand, which will weigh on oil prices and see some EMs struggling to diversify.
  • Table of Main Forecasts
  • Global Themes – In this edition, we assess the long-run effects of coronavirus on growth, debt and inflation.
  • World in 2050 – Public debt will still be very high, sustained by higher inflation and low interest rates. The US will remain the world’s largest economy with most EMs closing only a fraction of the income gap.
  • In the US, inflation seems most likely to surprise as the Fed focuses more on employment and keeps interest rates ultra-low. Japan’s inflation and growth will remain characteristically subdued.
  • In the euro-zone, Germany will continue to outperform most of its peers. France will suffer from a rigid labour market. Italy’s public debt now seems more sustainable given changes in the euro-zone’s policy stance. Accelerated technology use should make up for the damaging effects of Brexit in the UK.
  • In Canada, a large public investment programme will help the economy to weather the effects of falling oil demand. Australia will benefit from strong migration as the COVID-related decline proves temporary.
  • China’s policy response to the pandemic has been effective in the short-run, but it is only exacerbating the misallocation of resources to inefficient state firms which will see growth slow significantly in future.
  • India will be saddled with higher debt and fragile banks following the pandemic, but demographics and reform still point to strong future growth. Demographics will drag on growth in Other Emerging Asia.
  • In Emerging Europe, statist policymaking in Russia and Turkey will weigh on medium-term growth. Latin America will suffer from austerity and growth-sapping intervention to tackle huge debt burdens.
  • Most of the Middle East & North African economies will struggle to diversify away from oil and incomes will weaken compared to the US. Sub-Saharan Africa will take much longer than most to recover from the pandemic and will also suffer from climate change sooner and by more than the rest of the world.
  • In Commodities markets, the pandemic and related green energy intensive fiscal stimulus have brought forward the peak in oil demand which will progressively weigh on prices in future decades.
  • Ten Risks to the Global Outlook – Key fragilities relate to corporate debt in China and public debt in Italy.
  • Rankings – China is unlikely to overtake the US as the world’s largest economy by 2050. Italy and Brazil will lose their places in the top 10 and Indonesia and Australia will take their places.
  • Detailed Forecast Tables

Main Forecasts

Table 1: Real GDP (% Annual Change)

 

World

Share (2019)

Average

Forecasts, Average

PPP Ex. Rates

Market Ex. Rates

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

         

World (1)

100

100

3.6

3.4

1.8

4.2

2.8

2.7

         

Advanced Economies

        

US

15.9

24.5

0.9

2.2

1.2

3.5

2.0

2.3

Japan

4.0

5.9

0.0

1.1

-0.4

2.1

0.8

0.7

Euro-zone

12.5

15.3

0.8

0.8

0.2

2.4

1.2

1.1

– Germany

3.5

4.4

1.2

1.7

0.3

2.4

1.8

1.6

– France

2.4

3.1

0.8

1.0

-0.3

2.5

1.1

1.3

– Italy

2.0

2.3

-0.3

-0.7

-0.9

2.2

0.5

0.8

– Spain1.51.61.00.0-0.12.91.20.8

UK

2.4

3.2

0.5

2.0

-0.8

3.6

2.2

1.7

Canada

1.4

2.0

1.2

2.2

0.4

3.2

1.6

2.3

Australia

1.0

1.6

2.8

2.7

1.5

3.4

2.9

2.9

         

Emerging Asia

        

China (1)

17.4

16.4

10.6

6.7

4.5

4.8

2.4

1.8

India

7.1

3.2

8.3

6.5

3.9

8.6

5.9

5.0

Indonesia

2.5

1.3

6.1

5.5

3.8

5.7

4.3

3.7

S. Korea

1.7

1.9

4.3

3.1

2.0

3.2

2.2

1.6

Thailand

1.0

0.6

3.8

3.0

1.6

4.3

2.0

1.7

Philippines

0.7

0.4

5.0

6.0

3.4

7.9

5.3

4.4

         

Emerging Europe

        

Russia

3.1

1.9

3.7

1.6

0.5

2.4

1.4

1.5

Turkey

1.8

0.9

3.3

7.1

3.2

3.8

3.0

3.1

Poland

1.0

0.7

4.8

3.0

3.0

3.8

2.5

2.0

Czech Republic

0.3

0.3

2.6

1.7

1.4

4.0

2.4

1.8

         

Latin America

        

Brazil

2.4

2.1

4.5

1.2

-0.6

2.8

2.4

1.5

Mexico

2.0

1.4

1.6

3.0

-0.3

4.1

2.5

2.7

Argentina

0.8

0.5

5.1

1.5

-2.8

3.5

2.3

1.7

Colombia

0.6

0.4

4.5

4.7

0.4

3.9

2.2

1.7

         

MENA

        

Saudi Arabia

1.2

0.9

2.8

5.2

-1.1

4.0

2.4

2.0

Egypt

0.9

0.4

6.2

2.9

4.1

5.6

5.8

5.8

UAE

0.5

0.5

2.5

5.2

-0.2

4.8

2.9

0.8

Morocco

0.2

0.1

5.0

4.0

0.9

6.3

5.0

4.5

         

Sub-Saharan Africa

        

Nigeria

0.8

0.5

8.2

4.7

0.3

3.2

5.2

5.0

South Africa

0.6

0.4

3.1

2.2

-1.0

3.7

3.0

2.2

Angola

0.2

0.1

8.5

4.5

-2.0

3.0

4.4

3.7

Kenya

0.2

0.1

11.0

10.1

7.4

8.6

8.2

6.5

Sources: Refinitiv, Capital Economics

(1) We use our own China Activity Proxy (CAP)-derived GDP estimates for China for world aggregates.


Key Themes

Legacy of pandemic will be more debt and higher inflation

  • The key theme of our Long Run Outlook this year is that, in contrast to many commentators, we do not expect the coronavirus to do permanent damage to the level of world GDP or to future growth. Instead, its legacy will be higher debt, higher inflation, greater use of technology and an intensified pushback against globalisation.
  • The virus caused a sharp drop in the supply capacity of economies, largely because lockdowns forced workplaces to close. But most of this capacity should return quickly as lockdowns are eased and people go back to work. Demand should also recover: history suggests that behavioural changes due to fear of infection are unlikely to be permanent and the high level of savings and ongoing policy support should support spending. As such, we see world GDP returning to its pre-virus path as soon as the end of next year. (See Chart 1)
  • The behavioural changes which are more likely to be permanent could have positive effects. They include the greater use of technology in the workplace (see Chart 2), more spending online, the reduction in the use of cash, and a shift towards working from home. This supports our pre-existing view that technology will drive a pick-up in productivity growth in the developed economies in future. (See Chart 3)
  • One key legacy of the pandemic will be higher government debt. Ageing-related spending was already set to push debt higher but the additional spending around the pandemic has prompted us to raise our public debt forecasts still further compared to last year’s Long Run Outlook. (See Chart 4) There will be some modest austerity, but the debt will typically be sustained through permanently low interest rates and higher rates of inflation. (See Chart 5)
  • Central banks have already become more tolerant of higher inflation, with several adapting their targets to better promote economic growth. The need to manage debt will be another incentive for central banks to keep interest rates low, driven by the threat of austerity if not direct political interference. And if mandates shift further to encompass equality or environmental goals, inflation will feel more and more like a price worth paying. We see inflation rising in the decades ahead, most notably in the US. (See Chart 6)
  • The pandemic has widened the rift between China and the rest of the world, supporting our view that the recent wave of globalisation is coming to an end. As an economy that is still catching up, and which seems to be doubling down on an inefficient misallocation of resources by the state, China will lose from this. The trend presents an opportunity for some EMs which are able to position themselves as alternative manufacturing bases to China. But most, particularly the poorest, will see their path to development limited and the pace of EM catch-up looks set to slow. (See Chart 7)
  • Note, too, that while the world as a whole should not suffer permanent damage from COVID, some of the poorest EMs might. Poor access to vaccines, high debt levels and/or a reliance on tourism will limit growth in Latin America and particularly Sub-Saharan Africa.
  • Advanced economies should feel some benefits from efforts to green the economy. But Africa will suffer adverse effects of climate change sooner and by more than most. Meanwhile, the green energy intensive fiscal stimulus around the world has brought forward the likely timing of peak oil demand (see Chart 8), which will weigh on oil prices in future and see some EMs struggle to diversify.

Key Themes Charts

Chart 1: Level of World GDP vs Pre-virus Forecast
(100 = 2019)

Chart 2: Average Share of Products and/or Services that are Partially or Fully Digitised (%)

Chart 3: Productivity Growth (% y/y)

Chart 4: Public Debt (% of GDP)

Chart 5: Nominal Policy Rates in Major Developed Economies (%, end of period)

Chart 6: Inflation Forecasts (%, 2031-2050 average)

Chart 7: Real GDP (% y/y)

Chart 8: Global Oil Demand (Mn. BpD) and Real Brent Oil Price (US$ per Barrel)

 

Sources: Refinitiv, UNDP, OECD, World Bank, IMF, Climate Central


World in 2050

US will be relatively richer with most EMs closing only a fraction of the gap

  • Our long-term projections for real GDP growth of a little under 3% per year on average imply that the world economy will be 140% larger in 2050 than it was in 2020. Aggregate GDP will increase by around 80% in advanced economies and by 180% in emerging economies (EMs).
  • EMs will account for 58% of the world economy by 2050 at market exchange rates, compared to 45% now. India will more than triple its share of world GDP and overtake Germany and Japan to become the world’s third-largest economy. And Indonesia and Australia will take the place of Italy and Brazil in the top 10. But unlike many forecasters, we do not expect China to surpass the US as the world’s largest economy. Instead, weaker growth means that China’s share of world GDP will be stable. (See Charts 9 & 10.)
  • The rising importance of EMs in the world economy by 2050 will be partly due to more favourable demographics. The working age population is set to rise by around 25% in EMs and fall by 5% in advanced economies. Population growth will have been particularly rapid in Africa. (See Chart 11.)
  • But the gap between the US and most other advanced economies in GDP per capita terms will have widened by 2050. We still expect that Italy will have fallen furthest behind, with per capita income of just 51% of the US level by 2050, compared to 68% in 2019. Meanwhile, although Germany won’t close the gap, it will buck the euro-zone trend and will have broadly kept pace with the US on this measure.
  • Most EMs will close just a fraction of the income gap with the US, but there will be exceptions. We are especially optimistic about Vietnam, which has come closer to replicating the success of China than any other country. Per capita income there could reach 40% of the US level in 2050 – up from 16% today. However, in some EMs, such as Brazil and South Africa, the gap won’t close at all, and in others it will widen. (See Chart 12.)
  • The surge in debt burdens as a result of the pandemic is unlikely to have been fully reversed by 2050. Population ageing will result in a widespread increase in dependency ratios and more spending will need to be devoted to health care and pensions. (See Chart 13.) Government debt will be around 100% of GDP or higher in many economies. (See Chart 14.) And it will have exceeded 300% in Japan, although continued very low borrowing costs mean that this is unlikely to trigger a crisis.
  • Inflation will have settled at moderately higher rates in most advanced economies following a change in policy stance by central banks. This will be most pronounced in the US, where we expect the Fed to be comfortable with inflation staying around 3%. Accordingly, the price level will be around 25% higher in 2050 than if inflation averaged 2% over the next 30 years.
  • In contrast to most developed economies, inflation will typically have fallen in emerging markets. (See Chart 15.) This will reflect EM central banks establishing their independence and focusing on inflation targeting even while those in DMs broaden their sights.
  • Real interest rates (i.e. after taking account of inflation) will only be a little higher in 2050 than they are today. Many of the factors that have driven equilibrium interest rates to low levels by historical standards are likely to persist. Accordingly, real policy rates in advanced economies will be below 1% and even negative in some cases. (See Chart 16.)

World in 2050 Charts

Chart 9: % Shares of World GDP in 2019

(Market exchange rates)

Chart 10: % Shares of World GDP in 2050

(Market exchange rates)

Chart 11: Working-Age Population (100 = 2020)

Chart 12: Real GDP Per Capita % of US (2019 PPP e/r.)

Chart 13: Old-age Dependency Ratios (%)

Chart 14: Government Debt as % of GDP in 2050

Chart 15: Regional CPI Inflation

(%, annual average, 2019 PPP-weighted)

Chart 16: Real Policy Rates (%, 5-year moving avg.)

 

Sources: Refinitiv, UNDP, OECD, World Bank, IMF


United States

Higher public debt burden complicates the long-term outlook

  • The development of highly effective vaccines means that the coronavirus should be largely eliminated in the US within the next 12 months. Under those circumstances, we wouldn’t anticipate any lasting impact on economic activity, with GDP returning to its pre-virus trend. But the pandemic will leave a legacy in terms of an even higher public debt burden and even lower real interest rates. We are also increasingly convinced that the next decade will see inflation surprise on the upside.
  • The news that the Pfizer and Moderna vaccines are up to 95% effective is a potential game changer since, at that efficacy, there is a real possibility of eradicating the coronavirus entirely. Even without such effective vaccines, the population would eventually have reached herd immunity, but that could have taken several years.
  • Even after all restrictions are lifted, it will still take some time for the worst-affected services sectors like tourism, travel, leisure and food services to bounce-back fully. Nevertheless, we see no reason why there should be any permanent damage to the economy’s potential. Boosted by very accommodative monetary and fiscal policy, GDP growth should average 3.5% between 2021 and 2025 (see Chart 17), with the output gap first being eliminated and then, in the later 2020s, actual output rising back above the economy’s potential. (See Chart 18.)
  • The emergence of a positive output gap is only one of many reasons why we expect inflation to gradually rise to 3% in the 2030s. (See Chart 19.) Just as globalisation lowered goods prices over the past couple of decades, we expect deglobalisation to, at the very least, eliminate that deflationary pressure. The main reason, however, is that we think the Fed’s recent adoption of a flexible inflation target, and the greater weight it will now put on its full employment goal, are the first steps along a path that will end with the Fed all-but abandoning its price stability goal.
  • The Fed will keep its policy rate at near-zero until 2024 and even when it does begin to raise it, we expect the nominal rate to remain well below the rate of price inflation. Real short-term rates will stay below zero until the mid-2030s. Only after then do we expect the Fed to make a more serious effort to rein in inflation shifting policy to a more neutral setting.
  • Long bond yields are expected to rise gradually, in line with the fed funds rate, but we don’t expect concerns about higher inflation or the Federal debt to prompt investors to shun US bonds, particularly not when yields are likely to remain at even lower levels in most of the rest of the developed world.
  • The long period of negative real interest rates that we now envisage is the key reason why our forecasts show the Federal debt burden initially falling over the next couple of decades. Toward the end of the forecast period it begins to rise again, however, as the ageing of the population puts upward pressure on public spending on health care and pensions. (See Chart 20.)
  • The ageing of the population will also restrain annual labour force growth to be only 0.3% for most of our forecast period. Even allowing for productivity growth to average 2.0%, which would represent a marked improvement on the past decade, that means the economy’s potential growth rate would be only 2.3%.

United States Charts

Chart 17: Real GDP (%y/y)

Chart 18: Output Gap (%)

Chart 19: Inflation & Real Policy Interest Rate (%)

Chart 20: Federal Debt (As a % of GDP)

Table 2: United States Key Forecasts (% y/y, period averages, unless otherwise stated)

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

0.9

2.2

1.2

3.5

2.0

2.3

Real consumption

1.1

2.3

1.4

4.1

2.1

2.3

Productivity

1.3

0.8

1.3

1.8

1.7

2.0

Employment

-0.4

1.4

-0.1

1.7

0.3

0.3

Unemployment rate (%, end of period)

9.6

5.3

8.0

3.4

3.6

4.0

Wages

2.6

2.1

3.2

3.3

4.0

4.5

Inflation (%)

2.2

1.7

1.8

2.4

2.6

3.0

Policy interest rate (%, end of period)

0.25

0.50

0.13

0.25

1.50

4.00

Ten-year government bond yield (%, end of period)

3.3

2.3

1.0

2.1

2.6

4.5

Government budget balance (% of GDP)

-4.9

-4.9

-6.2

-7.2

-3.5

-6.6

Federal government debt (% of GDP, final year of period)

61

72

98

105

100

124

Current account (% of GDP)

-4.3

-2.4

-2.3

-2.4

-1.5

-1.3

Exchange rate ($ per €, end of period)

1.34

1.09

1.22

1.28

1.33

1.55

Nominal GDP ($bn, final year of period)

14,992

18,225

20,943

27,945

35,027

98,614

Population (millions, final year of period)

309

321

331

340

350

379

Sources: Refinitiv, Capital Economics


Japan

Stronger productivity growth to offset shrinking population

  • We are optimistic that the pandemic will not prevent productivity growth from accelerating over coming decades. But due to the shrinking population, trend GDP growth will remain broadly unchanged at around 1%. Meanwhile, we expect inflation to remain very subdued.
  • The pandemic has brought net migration to a near-standstill and we only expect it to return to pre-virus levels by 2024. After that, the population will shrink at an accelerating pace. (See Chart 21.)
  • The drop in the labour force participation rate during last year’s state of emergency has already completely unwound and we expect it to rise a little further over the coming years. But it won’t be long before the ageing of the population will start to become a drag. (See Chart 22.)
  • Before the pandemic, we were optimistic about the long-term outlook for productivity growth as the potential from existing ICT technology hasn’t been fully exploited yet. We also think that there will be a second wave of advances linked to technology and robotics.
  • We think that the pandemic will trigger a permanent shift towards working from home. This could boost the labour force participation rate of the elderly and women as Japanese workers have the longest commutes among G7 countries. (See Chart 23.) And it could spur productivity gains further as it forces firms to adopt more ICT technology. It could also deal a death blow to the outdated hanko system which requires documents to be manually stamped.
  • Japan has fallen behind Korea, Singapore and Germany in terms of the use of industrial robots. The pandemic could give adoption another boost as robots don’t catch coronaviruses.
  • One downside risk is that the recent surge in loan guarantees could keep unproductive zombie firms artificially live. However, the stock of credit-guaranteed loans isn’t any larger than it was after the GFC. (See Chart 24.) And given that the share of zombie firms in Japan is much lower than in many other rich economies, this probably isn’t a main reason why productivity growth has been weak in recent years.
  • All told, we stick to our forecast that productivity growth will accelerate towards 2% by 2050. However, that tailwind will be offset by the shrinking of the workforce and GDP growth should settle around 1%.
  • Inflation didn’t rise much as capacity shortages started to build before the pandemic and didn’t weaken much in the wake of the downturn. The expansion in the BoJ’s balance sheet has dwarfed the increase in the early stages of Quantitative and Qualitative Easing and the resulting surge in the money supply growth presents some near-term upside risks. Over the long-term though, we expect inflation to settle around 0.5% as the output gap closes.
  • The fallout from the pandemic will push the budget deficit to 12% of GDP this year. We think it could take a decade for the shortfall to narrow to pre-virus levels. And it may widen again thereafter as the ageing of the population lifts social security spending. The ratio of public debt to GDP could surpass 300% in the 2040s, but this is unlikely to trigger a public debt crisis as the Bank of Japan will keep borrowing costs very low.

Japan Charts

Chart 21: Annual Change in Population (‘000)

Chart 22: Labour Force Participation Rate (%)

Chart 23: Average Time Spent Commuting to Work
(15-64 years old, minutes)

Chart 24: Credit Guarantees Outstanding (% of GDP)

 

Sources: Refinitiv, OECD, United Nations, JFG, Capital Economics

Table 3: Japan Key Forecasts (% y/y, period averages, unless otherwise stated)

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

0.0

1.1

-0.4

2.1

0.8

0.7

Real consumption

0.4

0.6

-1.1

2.2

0.8

0.7

Productivity

0.1

0.7

-1.2

1.9

1.4

1.7

Employment

-0.2

0.3

0.8

0.1

-0.6

-0.9

Unemployment rate (%, end of period)

4.4

3.0

2.8

2.5

2.5

2.7

Wages

-1.0

0.1

0.3

1.1

1.3

1.7

Inflation (%)

-0.1

0.7

0.4

0.3

0.5

0.5

Policy interest rate (%, end of period)

0.10

0.10

-0.10

-0.10

-0.10

-0.10

Ten-year government bond yield (%, end of period)

1.1

0.3

0.0

0.0

0.0

0.0

Government budget balance (% of GDP)

-6.2

-7.1

-5.0

-7.3

-4.1

-3.5

Gross government debt (% of GDP, final year of period)

208

231

258

276

288

315

Current account (% of GDP)

3.6

1.5

3.6

1.2

1.6

1.4

Exchange rate (¥ per US$, end of period)

81

120

103

94

85

50

Nominal GDP ($bn, final year of period)

5,763

4,445

5,030

6,078

6,881

13,373

Population (millions, final year of period)

129

127

126

123

120

106

Sources: Refinitiv, Capital Economics


Euro-zone

Pandemic to cause less lasting damage than previous crises

  • We expect the pandemic to result in less permanent economic scarring than previous crises, while recent monetary and fiscal innovations have improved policymakers’ ability to deal with future shocks.
  • The economic recovery probably won’t be as slow and painful as it was after the global financial crisis. On the demand side, policy support has been much greater than in 2008/09, preventing banking and sovereign debt crises, and premature tightening seems unlikely. Private sector deleveraging will also be less of a drag. On the supply side, banks are helping rather than hindering the recovery, and there weren’t huge imbalances in the run-up to the pandemic that needed to corrected.
  • As a result, there should be less permanent “scarring” than after previous crises, with the economy eventually recouping most of the shortfall in output. (See Chart 25.) In a few years’ time, the economy should revert to its potential growth rate of about 1%.
  • There are long-term upside risks to inflation in advanced economies. The disinflationary effects of globalisation and demographic change might go into reverse, while loose policy and an institutional shift towards tolerating (or targeting) higher inflation could add to price pressures. We expect the ECB to follow the Fed by slightly increasing its inflation target later this year, in an attempt to generate inflation and reduce the real burden of debt.
  • However, the upside risks to inflation are smaller in the euro-zone than elsewhere. Eventually, the EU is likely to re-impose some form of fiscal rules, which will make it more difficult to cut taxes and raise spending. Meanwhile, core countries do not appear to have changed their views on the need for budget surpluses in normal times.
  • So the ECB will continue to shoulder most of the burden of demand management. Compared to the Fed, it has a bigger job on its hands, having undershot its inflation target for longer, and it has less monetary ammunition at its disposal. ECB policymakers have also said nothing to suggest that they intend to copy the Fed by paying less attention to inflation and more to developments in the labour market.
  • On balance, while we think that inflation in the euro-zone will increase very gradually in the long-term, we expect it to stay below that in the US. (See Chart 26.)
  • Nonetheless, monetary policy will need to remain extremely loose for a very long time. We assume that asset purchases under the APP will continue and interest rates will be unchanged until 2026. While the Bank will probably end its net purchases under the PEPP in 2022, it is likely to hold onto the bonds bought under the PEPP for a long time. And policymakers will remain open to implementing a similar programme again in future.
  • This would drastically reduce one of the currency union’s biggest vulnerabilities – the possibility of a debt crisis – and as a result we expect bond yields to rise only slowly and to remain at historically low levels. (See Chart 27.)
  • Meanwhile, the German and French economies look likely to pull away from their Italian and Spanish counterparts. (See Chart 28.) Both Italy and Spain have pre-existing productivity problems and poor demographic outlooks. This divergence could be a source of future crises, so it presents policymakers with one of their biggest challenges.

Euro-zone Charts

Chart 25: Euro-zone Real GDP (€bn)

Chart 26: Consumer Prices (% y/y)

Chart 27: 10-year Government Bond Yields (%)

Chart 28: Average Annual GDP Growth
(2025 – 2050, %)

Table 4: Euro-zone Key Forecasts (% y/y, period averages, unless otherwise stated)

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

0.8

0.8

0.2

2.4

1.2

1.1

Private consumption

0.8

0.2

-0.2

2.5

0.9

1.1

Productivity

0.4

0.6

-0.6

1.9

1.2

1.5

Employment

0.4

0.2

0.8

0.5

0.0

-0.4

Unemployment rate (%)

10.2

10.9

8.1

7.6

7.4

6.8

Wages

2.2

1.6

2.0

2.2

3.0

3.5

Inflation (%)

1.9

1.4

1.0

1.0

1.7

2.0

ECB deposit rate (%)1

0.25

-0.30

-0.50

-0.50

0.50

1.50

Government budget balance (% of GDP)

-3.4

-3.1

-2.4

-2.5

-1.6

-1.9

Government debt (% of GDP, final year of period)

86

91

97

92

87

77

Current account balance (% of GDP)

-0.5

1.6

2.8

2.6

3.2

3.0

Exchange rate ($ per €, end of period)

1.34

1.09

1.22

1.28

1.33

1.55

Nominal gross domestic product ($bn, final year of period)

12,604

11,663

12,929

17,436

21,062

45,501

Population (millions, final year of period)

336

340

339

340

340

333

Sources: Refinitiv, United Nations, World Bank, Capital Economics


Germany

Strongest economy in the euro-zone

  • The pandemic has dealt only a temporary blow to economic growth. It will leave a legacy of higher public debt, but the debt ratio remains low by international standards and is likely to fall. Germany will continue to be the strongest major euro-zone economy, thanks to continued relatively fast productivity growth.
  • The key headwind to German economic growth is its shrinking workforce. The population is projected to be roughly stagnant in the coming decades at around 83 million and a growing share will be above the retirement age, while the working-age population is set to decline. (See Chart 29.)
  • We expect this to be partly offset by an increase in the participation rate as more older people and women look for or stay in work. (See Chart 30.) The retirement age is already above that elsewhere, at 67 years, but pressures on the pension system will prompt further increases, perhaps to the Bundesbank’s recommended 69 years. Inward migration will also lift the labour force, but only moderately.
  • In other respects, Germany is well placed to benefit from the increase in productivity growth which we assume will take place as technological innovation kicks in. Germany has a skilled and flexible workforce and its openness to trade means it is well placed to adopt technological advances from elsewhere. We expect the auto sector to thrive as the world shifts to electric vehicles. Germany will also benefit from the green transition.
  • Nonetheless, the country will continue to underperform the US in terms of productivity growth. This is due to its under-developed digital infrastructure, bank-based financial sector, and family-owned corporate structure.
  • We expect GDP to recover fast in the immediate future but growth will average 1.5- 2.0% in the long run, almost entirely driven by productivity growth. (See Chart 31.) This would be substantially better than the euro-zone aggregate, where we expect long-term GDP growth to be just over 1%.
  • Meanwhile, we expect inflation to edge up but remain lower than in most other advanced economies as household consumption and wage pressures stay subdued. Along with low inflation rates in the rest of the euro-zone, this will enable the ECB to keep policy interest rates at rock-bottom levels.
  • High household and corporate savings will also result in Germany continuing to run a large current account surplus, albeit not as big as it has been in recent years. Exports to non-European countries, notably China and the US, will continue to grow in importance as the euro-zone share of world GDP declines.
  • Germany’s public debt jumped during the pandemic as the government fiscal response to the slump was among the most generous in Europe. Nonetheless, debt remains lower than it was during the euro-zone crisis and lower than in other advanced economies. Once the pandemic is over, the government will tighten fiscal policy again. With nominal interest rates well below nominal GDP growth, the debt ratio is likely to trend down over the medium term. (See Chart 32.)
  • The Next Generation EU fund sets a precedent for fiscal transfers within the euro-zone which we expect to be extended beyond the current seven-year EU budget timeframe. This will, however, account for only a small share of Germany’s external surplus. Germany will continue to be a net exporter of capital and this may contribute to the re-emergence of imbalances within the currency union in future.

Germany Charts

Chart 29: Population Aged 20-69 (Millions)

Chart 30: Participation Rate (%)

Chart 31: Employment, Productivity & GDP (% y/y)

Chart 32: General Government Debt (% of GDP)

Table 5: Germany Key Forecasts (% y/y, period averages, unless otherwise stated)

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

1.2

1.7

0.3

2.4

1.8

1.6

Real consumption

0.4

1.4

0.3

2.8

2.2

1.7

Productivity

0.3

0.7

-0.2

2.0

1.7

1.8

Employment

0.9

1.0

0.5

0.4

0.1

-0.2

Unemployment rate (%, end of period)

6.4

4.3

4.6

3.3

3.3

3.3

Wages

1.8

2.4

2.3

2.4

2.3

2.3

Inflation (%)

1.6

1.5

1.2

1.3

1.8

2.0

Ten-year government bond yield (%, end of period)

1.0

0.1

0.0

0.2

0.8

2.5

Government budget balance (% of GDP)

-1.8

0.1

0.2

0.1

-0.4

-1.0

Gross government debt (% of GDP, final year of period)

82

72

67

55

48

38

Current account (% of GDP)

6.0

7.1

7.1

5.3

4.6

3.3

Exchange rate ($ per €, end of period)

1.34

1.09

1.22

1.28

1.33

1.55

Nominal GDP ($bn, final year of period)

3,387

3,353

3,752

5,055

6,294

14,920

Population (millions, final year of period)

82

82

83

84

84

83

Sources: Refinitiv, United Nations, OECD, World Bank, Capital Economics


France

Economic potential held back by labour market rigidities

  • We suspect that the French economy will continue to grow at a decent pace over the next 30 years, aided by relatively favourable demographics and sufficient progress on reforms to boost productivity growth a bit too. The pandemic has saddled France with a much higher debt burden, but like elsewhere, we expect it to trend gradually down.
  • As in other advanced economies, France’s population is ageing. But it is doing so more slowly than elsewhere, thanks to its high birth rate. Indeed, while the United Nations’ latest projections show France’s working-age population starting to shrink in the next couple of years, it will still do so much more gradually than in Germany, for example. (See Chart 33.)
  • Meanwhile, the decline in labour force participation at the height of the pandemic has already largely been reversed. And we think there is scope for it to rise a bit further still. For a start, there is scope for female labour participation in France to rise, given that it has lagged behind that of Germany and Japan. (See Chart 34.) The shift to working at home, which has been accelerated by the pandemic, may encourage more women in particular to work.
  • Furthermore, we expect proposed pension reforms, which are currently on hold due to COVID-19, to be revived. As a result, workers in France, who tend to retire sooner than those in other countries (see Chart 35.), will eventually be incentivised to work for longer. But since these changes will kick in gradually and do not formally increase the pension age, any upward effect on the participation rate will be small.
  • We also think that recent reforms will ease labour market rigidities, which should help to raise employment rate. But the impact of population ageing will ultimately have an effect and by the mid-2030s, we expect no employment growth.
  • Productivity growth in France should pick up over the next few decades, in line with other advanced economies. Admittedly, educational attainment and skills levels are lower in France than it is in Germany. And there is a risk that the extensive government support provided during the pandemic will perpetuate zombie companies, weighing on productivity growth.
  • However, the business environment in France has improved over the past few years and, while there is a risk that a populist president reverses some of the recent reforms, we suspect that there will be further progress in opening markets to competition. Indeed, as part of its recovery plan the government announced it would abolish production taxes, which have long put firms in France at a disadvantage to those based in Germany.
  • So we expect productivity growth to rise from about 1% now to 1.6% by 2050, accounting for all of GDP growth by then. (See Chart 36.)
  • As elsewhere, pandemic-related measures have increased the budget deficit and caused the debt burden to jump. There is little chance of an early return to austerity. Moreover, spending on pensions and healthcare is higher than in many other advanced economies and is set to rise further with population ageing.
  • However, future governments will probably limit the increase in costs by raising the retirement age and/or increasing the tax burden. In all, we expect the budget to remain manageable and forecast the public debt ratio to fall to just below 90% by 2050.

France Charts

Chart 33: UN Projections Population Aged 15-64 (% y/y)

Chart 34: Female Participation Rate (15+, %)

Chart 35: Public Spending on Pensions (% of GDP, 2017)

Chart 36: Employment, Productivity & GDP (% y/y)

Table 6: France Key Forecasts (% y/y, period averages, unless otherwise stated)

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

0.8

1.0

-0.3

2.5

1.1

1.3

Real consumption

1.5

0.6

-0.3

2.2

1.1

1.3

Productivity

0.4

0.6

-1.2

2.1

1.0

1.3

Employment

0.4

0.4

0.8

0.4

0.1

0.0

Unemployment rate (%, end of period)

9.1

10.0

8.1

8.5

8.1

8.5

Wages

2.5

1.7

1.6

2.4

2.8

3.3

Inflation (%)

1.7

1.2

1.1

1.3

1.8

2.0

Ten-year government bond yield (%, end of period)

1.0

0.1

0.0

0.7

1.3

3.0

Government budget balance (% of GDP)

-4.5

-4.3

-4.4

-3.5

-2.1

-2.5

Gross government debt (% of GDP, final year of period)

85

96

115

111

106

92

Current account (% of GDP)

-0.6

-0.7

-0.8

-0.8

-0.4

-1.7

Exchange rate ($ per €, end of period)

1.34

1.09

1.22

1.28

1.33

1.55

Nominal GDP ($bn, final year of period)

2,639

2,438

2,595

3,504

4,207

9,512

Population (millions, final year of period)

63

64

65

67

68

70

Sources: Refinitiv, United Nations, OECD, World Bank, Capital Economics


Italy

Higher debt, but more sustainable

  • The pandemic has pushed Italy’s public debt ratio to its highest since the country unified in 1861. But paradoxically, the debt load looks more sustainable than it did before the crisis.
  • The government can’t rely on economic growth to do much heavy lifting when it comes to reducing the debt ratio, as Italy looks set to continue growing more slowly than most other advanced economies due to its adverse demographics and poor productivity growth.
  • The population would have shrunk over past 25 years if it wasn’t for immigration. And the situation is set to get worse as the birth rate continues to fall rapidly. (See Chart 37.)
  • That said, some of this effect will be offset by increased labour market participation. Last year’s pandemic-induced drop in participation should reverse quickly. The female participation rate should keep rising from a low level, and a growing share of older workers is likely to remain economically active too.
  • Meanwhile, Italy’s “total factor productivity” (i.e. the efficiency with which all inputs are used) has actually fallen over the past 25 years. This contrasts with just about every other advanced economy. (See Chart 38.)
  • Looking ahead, Italy should benefit from a general pick-up in productivity growth across advanced economies. But we suspect that it will continue to be a laggard, given its difficult business and legal environment, low IT adoption, and relatively low education levels.
  • Overall, our demographic and productivity projections suggest that GDP growth will average between 0.5% and 1% over the next 30 years. So the other major euro-zone economies are likely to pull away from Italy.
  • We assume that inflation will rise gradually to 2%. Admittedly, core inflation has been weaker in Italy than in the region as a whole for the past seven years. But policy should be more supportive than after the euro-zone debt crisis. And some global forces will push up inflation too, including the fading disinflationary effect of globalisation and demographic change.
  • The ageing population will also put pressure on the public finances. The UK’s OBR projects that ageing there will add about 0.2% to the deficit every year, and Italy’s demographics are even worse. But we don’t think that the government would let the budget deficit widen indefinitely. It could, for example, raise the pension age and make budget cuts in other areas.
  • What’s more, as a result of the ECB’s extremely loose policy stance, and to a lesser extent steps towards greater fiscal integration in Europe, bond yields look set to remain much lower than we had previously anticipated. This means that we now expect debt interest spending to fall as a share of GDP over the next few years, and remain at historically low levels thereafter. (See Chart 39.)
  • Our new higher inflation forecasts and lower bond yield forecasts have radically altered our debt projections. Rather than expecting the public debt ratio to increase, we now think it will fall gradually. That said, even by 2050 it is likely to still be high. (See Chart 40.)
  • And Italy’s debt burden is still a risk. We would highlight three potential triggers of a debt crisis: first, the ECB reining in its support too quickly; second, another economic crisis that adds even more to the debt burden; and third, the election of a government which is not fully committed to honouring the debt or keeping the euro.

Italy Charts

Chart 37: Italy’s Population (% y/y)

Chart 38: Total Factor Productivity (1995 = 100)

Chart 39: Italian Government’s Debt
Interest Expenditure (% of GDP)

Chart 40: Italy’s Public Debt (% of GDP)

Table 7: Italy Key Forecasts (% y/y, period averages, unless otherwise stated)

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

-0.3

-0.7

-0.9

2.2

0.5

0.8

Real consumption

0.2

-0.8

-1.1

2.6

0.7

0.9

Productivity

-0.4

-0.6

-1.4

1.7

0.4

1.0

Employment

0.1

0.0

0.4

0.5

0.1

-0.2

Unemployment rate (%, end of period)

8.3

11.9

9.1

9.4

9.0

8.9

Wages

2.8

1.4

0.8

1.2

2.2

3.0

Inflation (%)

2.0

1.6

0.6

1.1

1.8

2.0

Ten-year government bond yield (%, end of period)

4.9

1.6

0.5

1.2

1.8

3.5

Government budget balance (% of GDP)

-3.4

-3.0

-3.8

-4.0

-2.0

-2.6

Gross government debt (% of GDP, final year of period)

119

135

157

152

145

125

Current account (% of GDP)

-2.7

0.3

2.6

2.8

2.6

1.5

Exchange rate ($ per €, end of period)

1.34

1.09

1.22

1.28

1.33

1.55

Nominal GDP ($bn, final year of period)

2,131

1,835

1,880

2,476

2,881

5,798

Population (millions, final year of period)

59

61

59

59

58

55

Sources: Refinitiv, Eurostat, Reinhart & Rogoff, Capital Economics


United Kingdom

COVID-19 legacy may be higher inflation and bigger public deficits

  • The legacy of the COVID-19 crisis for the UK is unlikely to be a permanently smaller economy and is more likely to be that low inflation is sacrificed to allow bigger public deficits.
  • We don’t think the COVID-19 recession will mean that the economy is any smaller in 2050 than it would have been if COVID-19 never existed. That would be a very different outcome to after the 2008/09 GFC, when GDP in the UK shifted onto a much lower path than in most other economies. (See Chart 41.) This time round, the pre-crisis trend was not inflated by a housing bubble and there’s been no financial crisis to scupper the UK’s supply of credit.
  • Admittedly, by raising trade barriers and by cutting net migration from the EU, Brexit will probably chip away at future growth rates of productivity and the labour force.
  • But for some time, we have been suggesting that such effects would be offset by a rebound in productivity growth triggered by the digital revolution. If anything, by making the use of technology in the workplace more prevalent, the pandemic will probably exacerbate and bring forward that boost. And the UK’s progressive attitude to technology means it’s well placed to benefit by more than others.
  • As such, we still believe that a rebound in productivity growth in the 2020s will offset a further easing in the growth of the labour force driven by the ageing of the population to leave the economy’s potential rate of growth in the 2030s and 2040s close to 1.7%. (See Chart 42.)
  • Instead, the legacy of the COVID-19 crisis may prove to be a combination of higher inflation and bigger public deficits. Spare capacity will keep inflation below the Bank of England’s 2% target for a few years yet.
  • But if both monetary and fiscal policy are still very loose by the time GDP returns to its pre-crisis trend around the middle of the 2020s, as seems likely, then inflation will probably creep above the current 2% target.
  • If the policy regime remained the same, the Bank of England would raise interest rates to bring inflation down to 2%. But as higher rates would increase the public deficit and the public debt ratio, they would reduce the ability of the government to use fiscal policy to achieve its political aims. As such, there’s a clear incentive for the government to ensure interest rates stay low. And the UK government is probably more inclined than most to act on it. It may do that by raising the inflation target or shifting the focus to GDP growth and/or climate change.
  • Interest rates would probably still rise at some point. But they will stay low by historical standards. Indeed, by 2050 the real equilibrium interest rate (the nominal 10-year bond yield less the inflation rate) may still be just 0.75%.
  • As a result, we think the average inflation rate in the 2030s and 2040s will be 2.5%. (See Chart 43.) And the government will persistently run annual deficits worth 4-5% of GDP. Fiscal policy would still need to be tightened in the late 2020s and throughout the 2030s and 2040s to counter the declining tax-take and rising spending burden from the ageing of the population. But the government would do only what is necessary to prevent the debt ratio from rising significantly above 100%. (See Chart 44.)
  • Overall, a full recovery from the COVID-19 crisis may eventually force the government to choose between either low inflation or bigger public deficits. We think the government would choose the latter, thereby leading to permanently higher inflation.

United Kingdom Charts

Chart 41: Real GDP (£bn)

Chart 42: GDP, Productivity, Labour Force (%y/y)

Chart 43: CPI Inflation & Policy Rate (%)

Chart 44: Government Budget Balance & Debt

Table 8: United Kingdom Key Forecasts (% y/y, period averages, unless otherwise stated)

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

0.5

2.0

-0.8

3.6

2.2

1.7

Real consumption

0.4

2.0

-0.9

4.7

2.2

1.6

Productivity

0.3

0.6

-1.6

3.0

1.6

1.4

Employment

0.3

1.4

0.9

0.6

0.6

0.3

Unemployment rate (%, end of period)

7.9

5.4

4.5

4.3

3.5

4.0

Wages

3.0

1.6

2.5

2.9

4.0

4.1

Inflation (%)

2.7

2.3

1.7

1.9

2.4

2.6

Policy interest rate (%, end of period)

0.50

0.50

0.10

0.10

1.00

2.75

Ten-year government bond yield (%, end of period)

3.51

1.96

0.39

1.25

1.75

3.75

Government budget balance (% of GDP)

-7.0

-4.6

-6.1

-4.0

-3.7

-4.4

Gross government debt (% of GDP, final year of period)

69.7

82.3

104.5

96.6

94.1

99.8

Current account (% of GDP)

-3.3

-4.0

-3.9

-5.1

-5.7

-5.5

Exchange rate (US dollar per pound, end of period)

1.57

1.47

1.37

1.50

1.56

1.59

Nominal GDP ($bn, final year of period)

2,480

2,933

2,730

4,217

5,540

13,181

Population (millions, final year of period)

63

65

67

69

71

76

Sources: UN, ONS, Refinitiv, Capital Economics


Canada

Slower labour force growth to keep a lid on GDP growth this decade

  • The ageing population will act as a headwind this decade, but potential GDP growth is set to rise from 2030 as labour force and productivity growth pick up. Meanwhile, there is good reason to expect inflation to be higher in the coming decades than in the recent past.
  • Population ageing is set to accelerate this decade. Even allowing for strong immigration, the UN expects the share of the population aged 20 to 64 to fall from 61% to 57% by 2030, and the share aged over 65 to rise from 18% to 23%. (See Chart 45.) This means potential labour force growth is set to slow to just 0.2% per year in the second half of the 2020s, following actual labour force growth of 1.1% in the five years before the pandemic.
  • The effect of slower labour force growth should be mostly offset by higher productivity growth. The weak rate of annual productivity growth in the past five years, of 0.3%, was partly due to the negative effect of the 2014/15 slump in oil prices. We do not expect a resurgence in the oil sector, given global oil demand will soon peak and the pandemic has worsened the debt situation, but there are nevertheless two reasons why productivity growth should rise.
  • First, the pandemic has accelerated the adoption of new technologies across almost every sector of the economy. Second, the pandemic has also accelerated political trends, with the populace now even more eager to see the government take an activist approach to fiscal policy. This suggests the government’s recent commitment to a large investment program is a sign of things to come, which will help to support overall investment.
  • The upshot is that we see potential GDP growth slowing from slightly less than 2% before the pandemic to 1.7% between 2025 and 2029, before it picks up to 2.2% over the following two decades. (See Chart 46.)
  • The changing institutional approach to policy setting also presents upside risks to inflation. The government has hinted that it will target full employment, which together with demographic changes leads us to think the unemployment rate will drop to 5% in the coming decades, compared to an average of 6.9% in the past 20 years. Lower unemployment should lead to higher inflation, which the Bank of Canada seems more likely to tolerate given signs it is growing concerned about the effects of its current policy framework on inequality. We expect the Bank to allow inflation to sit in the upper half of its 1% to 3% target range, averaging 2.5% between 2030 and 2050.
  • The Bank’s approach could change by more than we assume after the 2021 review of its monetary policy framework. For now, our forecasts still imply inflation will average below that in the US over the coming decades. This difference means the exchange rate is set to appreciate in Canada’s favour in nominal terms, but be little changed in real terms.
  • The government’s new approach and pressure on the public finances from the ageing population means we are forecasting a general government deficit of 3.5% of GDP between 2030 and 2050. Our estimate of potential nominal GDP growth of over 4% during that period implies the debt-to-GDP ratio will still drop back from the near 110% recorded this year. (See Chart 47.) It is trends in potential GDP growth and inflation, rather than public debt, that lead us to think that interest rates will rise. By the 2050, we see the policy rate at 3.25% and 10-year yield at 4.0%. (See Chart 48.)

Canada Charts

Chart 45: Share of Population (%)

Chart 46: Contributions to Real GDP Growth (%)

Chart 47: General Government Budget Balance & Gross Debt (% of GDP)

Chart 48: Policy Rate & 10-Year Bond Yield (%)

Table 9: Canada Key Forecasts (% y/y, period averages, unless otherwise stated)

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

1.2

2.2

0.4

3.2

1.6

2.3

Real consumption

3.1

2.3

0.7

3.6

1.6

2.3

Productivity

0.1

1.0

0.2

1.5

1.3

1.9

Employment

1.0

1.1

0.3

1.7

0.3

0.4

Unemployment rate (%, end of period)

8.0

6.9

9.5

5.7

5.5

5.0

Wages

2.9

3.1

2.4

2.3

3.8

4.4

Inflation (%)

1.7

1.7

1.6

2.1

2.4

2.4

Policy interest rate (%, end of period)

1.00

0.50

0.25

0.75

1.25

3.25

Ten-year government bond yield (%, end of period)

3.1

1.4

0.9

2.0

2.5

4.5

Government budget balance (% of GDP)

-1.0

-1.4

-3.5

-3.4

-3.1

-3.5

Gross government debt (% of GDP, final year of period)

81

91

110

101

98

85

Current account (% of GDP)

-0.8

-3.0

-2.5

-1.9

-2.0

-2.0

Exchange rate (CAD per USD, end of period)

1.0

1.4

1.3

1.2

1.2

1.1

Nominal GDP ($bn, final year of period)

1,618

1,556

1,622

2,376

2,906

7,905

Population (millions, final year of period)

34

36

38

39

41

46

Sources: Refinitiv, UN, Capital Economics


Australia

Outperformance to continue as immigration resumes

  • The pandemic will temporarily curb Australia’s population growth by restraining net migration, but we expect immigration to pick up again over the coming years. Coupled with a rebound in productivity growth in line with global trends, Australia will remain the fastest-growing large advanced economy.
  • The border has been closed in the wake of the pandemic. As a result, population growth halved to below 1% in 2020. We expect the border to reopen in mid-2021 so population growth should rebound as migration resumes. But we think it will slow again towards the end of our forecast horizon as the natural increase in the population diminishes. (See Chart 49.)
  • The labour force participation rate has already completely reversed the plunge in the first half of 2020. We expect it to rise above pre-virus levels over the next couple of years as the retirement age is raised to 67 from 2023. However, the ageing of the population should result in a renewed fall in the long-run. (See Chart 50.)
  • Bankruptcies are set to rebound from very low levels as loan deferrals end, but the capital stock of failed firms won’t disappear. And the crisis could well encourage firms to use more information and communication technology, which should lift productivity.
  • In the long run, we are optimistic that a global resurgence in technological progress will lift productivity growth further from just under 1% in recent years towards 1.7% over the coming three decades. The upshot is that potential growth should settle around 3%. (See Chart 51.)
  • Stronger productivity growth should provide a boost to wage growth from 2% in recent years towards 4%. However, the surge in public debt in the wake of the pandemic coupled with persistent slack in the labour market means that the Reserve Bank of Australia will be in no rush to tighten policy. We expect the Bank’s cash rate target to rise to only 2.0% by 2030.
  • Strong Chinese demand for Australian iron ore has pushed mining’s share of output to a fresh record high, but we expect the structural slowdown in China’s economy to stymie the long-term prospects for the sector. Agricultural output should fall as climate change leads to more frequent and severe dry spells. And slower population growth means that construction will account for a smaller share of output. (See Chart 52.) The winners will probably be finance, education and health.
  • The marked improvement in the current account in recent years is partly structural as interest rates have collapsed. But we expect iron ore prices to fall to US$55 per tonne by 2025. The upshot is that the current account should return into deficit over the next two decades.
  • While the current downturn will lift the combined deficit of federal and state governments to around 14% of GDP this year, expenditure is already falling again sharply. We’ve assumed the deficit will average 2% of GDP over the longer-term.
  • That means that the ratio of public debt to GDP should peak around 70% in the middle of this decade and may fall to around 50% by end-2050. Australia was able to deal with much higher debt loads in the first half of the 20th century and we doubt that bond investors will get spooked. In any case, the RBA will prevent borrowing costs from soaring.

Australia Charts

Chart 49: Contributions to Annual Population Growth (%-pts)

Chart 50: Labour Force Participation Rate (%)

Chart 51: Contributions to Annual GDP Growth (ppt)

Chart 52: Output by Sector (% of total)

Table 10: Australia Key Forecasts (% y/y, period averages, unless otherwise stated)

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

2.8

2.7

1.5

3.4

2.9

2.9

Real consumption

3.6

2.6

0.6

3.8

2.7

2.9

Productivity

0.6

1.4

-0.1

1.6

1.4

1.8

Employment

2.5

1.3

2.2

1.1

1.5

1.1

Unemployment rate (%, end of period)

5.2

6.1

6.5

5.1

4.5

4.3

Wages

3.9

3.0

2.0

2.8

3.4

4.3

Inflation (%)

3.0

2.3

1.5

1.6

1.9

2.5

Policy interest rate (%, end of period)

4.75

2.00

0.10

0.25

1.00

2.50

Ten-year government bond yield (%, end of period)

5.5

2.9

1.0

1.8

2.3

3.5

Government budget balance (% of GDP)

-1.5

-3.3

-4.6

-5.1

-2.6

-2.0

Gross government debt (% of GDP, final year of period)

20

38

57

69

66

49

Current account (% of GDP)

-5.1

-3.7

-0.9

0.7

-0.3

-1.4

Exchange rate (US$ per Aus$, end of period)

1.03

0.73

0.77

0.81

0.81

0.90

Nominal GDP ($bn, final year of period)

1,250

1,232

1,349

1,946

2,475

7,754

Population (millions, final year of period)

22

24

26

27

29

36

Sources: Refinitiv, Capital Economics


China

From growth star to middle-of-the-road EM

  • China’s current economic strength shouldn’t be extrapolated too far into the future. The policy response to the COVID-19 pandemic, while effective in the short-run, is pushing more resources to inefficient state firms and will add to China’s debt burden. With the chances of major market-opening reforms diminishing, especially amid pressure to reduce dependence on the West, we expect trend growth to slow significantly over the decades ahead.
  • Despite touting the need for “rebalancing” toward consumption for over a decade, the investment share of GDP remains among the largest in the world and it surged last year due to the COVID-19 stimulus.
  • This key engine of short-term growth is delivering diminishing returns. Even prior to the latest round of investment-led stimulus, China’s capital stock had, relative to its GDP, soared above other capital-intensive economies. (See Chart 53.) Front-loading of infrastructure building can still shore up near-term activity but without market signals to guide it, it goes hand-in-hand with misallocation of resources.
  • Private sector investment will decelerate further. Slowing urban household formation means that fewer homes will need to be built each year. And with China’s share of global exports unlikely to rise much further, the manufacturing sector will be unable to continue adding factories at the same rate as in the past without creating overcapacity.
  • China’s shrinking pool of labour will also become a more forceful headwind. Attempts to boost the birth rate have failed. Labour force participation rates are already high. And China is too big to rely on immigration to any meaningful degree. The drag on economic growth will reach almost 0.5%-pt by 2030.
  • Policymakers could offset these headwinds through market-based reforms to boost productivity growth. But policy under President Xi has favoured tightening political control and cementing the role of state firms, which are no longer ceding ground to their more productive private counterparts. (See Chart 54.)
  • Decoupling with the West is exacerbating this trend by encouraging China to double down on state-led industrial policy. Officials appear set to continue directing resources to favoured industries and firms. There is no guarantee these efforts will deliver the desired results, as the failure to reduce reliance on foreign chips shows. (See Chart 55.) Instead, state intervention is more likely to weigh on productivity growth.
  • China’s debt burden, which jumped the most since 2009 last year, is also a major barrier to reform since there is a growing risk of financial instability as state support is withdrawn. A smooth transition to market pricing of credit risks, which is sorely needed to improve credit allocation, will be challenging to pull off. Most likely, officials will ultimately turn to financial repression and lower long-run interest rates to keep the financial system afloat.
  • All told, we think China’s trend growth rate will slow from around 4.5% currently (on our estimates) to about 2% from 2030 onwards. In other words, China will fall off the path of rapid development laid down by Japan, Korea and Taiwan. Instead, it will start to resemble most middle-income EMs which converge with developed economies at a much slower pace, if at all. (See Chart 56.)
  • The renminbi may still strengthen over the long-run, however, as slower investment boosts China’s external position by curtailing imports and persistent overcapacity keeps inflation low.

China Charts

Chart 53: Capital Stock (% of GDP)

Chart 54: State Firms’ Share of Assets in Key Sectors (%)

Chart 55: Integrated Circuit Consumption

Chart 56: GDP per Capita (% of US level, current US$)

 

Sources: Penn World Table, UN, World Bank, CEIC, Capital Economics

Table 11: China Key Forecasts (% y/y, period averages, unless otherwise stated)

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP*

10.6

6.7

4.5

4.8

2.4

1.8

Real consumption

9.9

8.1

6.2

5.7

3.2

2.6

Productivity

10.1

6.3

4.6

5.2

3.1

2.5

Employment

0.4

0.4

-0.1

-0.4

-0.6

-0.7

Unemployment rate (%, end of period) 1)

5.2

5.1

5.2

5.0

5.0

5.0

Wages

14.5

11.9

7.7

6.8

4.6

4.3

Inflation (%)

3.0

2.8

2.2

1.5

1.5

1.5

Policy interest rate (%, end of period) 2)

0.00

2.25

2.20

2.00

1.50

0.50

Ten-year government bond yield (%, end of period) 3)

3.9

2.9

3.3

2.3

2.0

1.0

Government budget balance (% of GDP)

-1.3

-2.1

-4.6

-5.0

-4.4

-3.0

Gross government debt (% of GDP, final year of period)

16

37

48

58

68

79

Current account (% of GDP)

7.2

2.2

1.4

1.4

1.4

1.7

Exchange rate (RMB per US$, end of period)

6.6

6.5

6.5

5.9

5.5

4.0

Nominal GDP ($bn, final year of period)

6,089

10,961

14,790

23,305

30,547

80,126

Population (millions, final year of period)

1,338

1,371

1,439

1,458

1,464

1,402

*based on CE China Activity Proxy; Sources: Refinitiv, Capital Economics; 1) Urban surveyed rate; 2) PBOC 7-day reverse repo rate; 3) Local currency


India

COVID-19 crisis to take a toll but long-term outlook still bright

  • The COVID-19 crisis will leave a legacy of impaired household, corporate and bank balance sheets that will cast a shadow over demand for years. We think that the economy will be 5% smaller in 2050 than it would have been had the crisis not occurred.
  • There are ways in which the crisis may also affect the supply potential of the economy. For example, a damaged banking sector will weigh heavily on investment which will harm the growth of the capital stock. However, the virus has not led to destruction of productive capacity as occurs in wars or natural disasters. And the crisis will increase the incentive for firms to invest more in some areas like touchless technologies.
  • What’s more, there are still a few reasons why a more positive view on India’s long-term prospects is still justified, at least relative to other EMs. The expansion of the working age population in India is set to continue. It will replace China as home to the world’s largest labour force by around 2025. (See Chart 57.)
  • What’s more, Prime Minister Modi’s BJP has expedited labour market reforms that normally face stiff political resistance, ostensibly as part of efforts to support the recovery from COVID-19. These will do little to boost demand in the near term. But over time, these measures could start to deliver benefits by reducing the disincentives that hold back growth of labour-intensive firms.
  • The reforms also send a positive signal of the BJP’s willingness to use its burgeoning political clout – it has the largest Lok Sabha majority since the 1980s (see Chart 58.) – to push ahead with measures that would previously have been deemed too contentious. If further labour (and land) reforms follow, that would lay the foundation for strong potential growth.
  • If the government does embrace this opportunity, the long-term benefits to productivity could be substantial. India has massive scope to shift the labour force from low to high productivity sectors, and replicate the best practices of economies that have already transitioned to higher income.
  • The COVID-19 crisis will cause the budget deficit to widen sharply and the public debt ratio to surge. But over the long term, public debt should drop back as a share of GDP (see Chart 59.) due to a combination of relatively strong growth in nominal GDP and policymakers keeping a lid on long-term yields through financial repression.
  • The broad trend is that inflation typically falls as emerging economies converge with advanced economies. We suspect that the RBI will reduce its inflation target over time, as central banks in many wealthier EMs have done.
  • India is likely to run a persistent current account deficit over the long term. That shouldn’t be a problem as long as it remains small, as it has been for the past five years. Indeed, if the deficit was the result of strong investment, that would be a positive.
  • The real exchange rate is likely to continue appreciating due to relatively strong productivity gains. And given our expectations of structurally higher rates of inflation in the US over the coming years, we also think the nominal rupee exchange against the US dollar will appreciate slightly over our forecast horizon. (See Chart 60.)

India Charts

Chart 57: Working Age Population (Millions)

Chart 58: Lok Sabha Election Results
(% of Seats Won by Leading Party)

Chart 59: Gross Government Debt (% of GDP)

Chart 60: Rupee vs US$

 

Sources: UN, CEIC, Bloomberg, Capital Economics

Table 12: India Key Forecasts (% y/y, period averages, unless otherwise stated)

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

8.3

6.5

3.9

8.6

5.9

5.0

Real consumption

8.1

7.3

7.0

5.8

7.8

6.5

Productivity

8.2

5.2

5.1

4.9

4.5

3.8

Employment

0.1

1.3

1.6

1.5

1.4

1.2

Inflation (%)

8.7

8.2

4.5

4.3

4.0

3.7

Policy interest rate (%, end of period)

6.25

6.75

4.00

4.50

5.00

5.00

Ten-year government bond yield (%)

8.0

8.1

6.0

5.5

6.3

6.5

Government budget balance (% of GDP)

-7.6

-7.4

-8.3

-7.7

-6.2

-5.4

Gross government debt (% of GDP, final year of period)

66

69

90

79

75

68

Current account (% of GDP)

-2.0

-2.9

-1.1

-1.7

-1.7

-1.5

Exchange rate (Rupees per USD, end of period)

44.7

66.2

73.1

70.9

69.4

62.3

Nominal GDP ($bn, final year of period)

1,708

2,087

2,575

4,952

8,204

49,951

Population (millions, final year of period)

1,234

1,310

1,383

1,445

1,504

1,639

Sources: UN, CEIC, Refinitiv, Bloomberg, Capital Economics


Other Emerging Asia

Structural factors to weigh on growth after pandemic has passed

  • We are hopeful that the pandemic will not have a major impact on the region’s long-run prospects. But slowing productivity growth and less favourable demographics will still cause the trend rate of growth across the region to decline after the pandemic has passed.
  • The impact of the COVID-19 crisis has had a mixed impact across the region. Taiwan has already returned to its pre-virus path, while Vietnam and Korea are not far behind. However, the Philippines, Thailand and other tourist-dependent countries have been hit hard by the crisis.
  • Over the long term, the supply side of the economy should not be too badly affected by the crisis. While investment growth in some countries will be weak over the coming years, the virus has not led to destruction of productive capacity as occurs in wars or natural disasters. What’s more, the crisis will increase the incentive for companies to invest in new technologies, which may raise productivity.
  • We are more worried that the drag from the crisis on demand will take years to fade. Households, governments and companies in the worst-hit countries have taken on extra debt and will require a period of retrenchment, which will drag on consumption, government spending and investment. 
  • Looking beyond the pandemic, other structural factors will also weigh on growth prospects. Demographics will become less supportive everywhere. In the original Asian Tiger economies of Hong Kong, Singapore, Korea and Taiwan, working age populations will fall over the coming decades. In the rest of the region, the growth rate of the working age population will slow. (See Chart 61.)
  • The Tiger Economies are now among the most developed in the world (see Chart 62.), and productivity in these countries has been declining for decades. (See Chart 63.) Although innovations in robotics and AI may help to boost productivity, this is unlikely to offset the fall in their working age populations.
  • Elsewhere, the outlook is more positive. South and South East Asia have the potential to boost productivity by shifting the labour force from low to high productivity sectors and replicate the best practice of richer economies. We are especially optimistic about Vietnam, where a combination of low wages and recent improvements to the business environment (see Charts 64. & 65.) mean the export-orientated manufacturing should continue to drive growth.
  • However, low-income countries are not guaranteed rapid catch-up growth. (See Chart 66.) If an economy is poor today, it is probably due in large part to institutional failure. If institutions remain weak and policymaking fails to improve, then potential development may continue to be squandered. Meanwhile, deglobalisation could cut off a key route to development in the Asian economies, which are particularly open and have relied on their role in global supply chains.
  • Further reforms to free-up inflexible labour markets (Indonesia) and improve dreadful infrastructure (the Philippines) are needed if these countries are to fulfil their potential. Meanwhile, in Thailand, years of political uncertainty and upheaval have taken a toll on the country’s institutions and led to a decline in investment. (See Chart 67.) Political uncertainty is also a big concern in Pakistan and Sri Lanka.
  • South East Asia and South Asia are vulnerable to climate change. The biggest threat comes from rising sea levels, with Vietnam, Thailand and Bangladesh likely to be worst affected. (See Chart 68.) These countries lack the resources to build effective defences and are likely to be hit hardest by rising temperatures.

Other Emerging Asia

Chart 61: Projected Annual Change in Working-age Population (%, annual average)

Chart 62: GDP Per Head (PPP, US = 100, 2019)

Chart 63: Labour Productivity Growth in NIEs *
(%, annual average)

Chart 64: Vietnam Business Environment Rankings (lower number corresponds to better ranking)

Chart 65: Monthly Manufacturing Wages (US$)

Chart 66: Productivity Growth & GDP per capita

Chart 67: Thailand Private Investment ex. Dwellings
(THBbn, constant prices, 4Q sum)

Chart 68: Numbers Living Below High Tide by 2050 in High Emissions Scenario (% of population)

 

Sources: Refinitiv, CEIC, ABO, World Bank, CE, Climate Central, JETRO

Table 13: Emerging Asia Key Forecasts (% y/y, period averages, unless otherwise stated)

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Emerging Asia

           

Real GDP

8.0

6.0

3.9

5.6

3.6

3.2

Inflation (%)

4.9

4.2

2.7

2.4

2.5

2.6

Korea

           

Real GDP

4.3

3.1

2.0

3.2

2.2

1.6

Inflation (%)

3.0

1.9

1.1

1.0

1.8

2.0

Ten-year government bond yield (%, end of period)

4.5

2.1

1.7

1.5

1.5

1.5

Exchange rate (Per US Dollar, end of period)

1,135

1,173

1,086

1,014

978

739

Nominal GDP ($bn, final year of period)

1,144

1,465

1,619

2,310

2,899

7,741

Population (millions, final year of period)

50

50

51

51

51

47

Taiwan

           

Real GDP

4.4

2.9

2.4

2.4

1.3

1.0

Inflation (%)

1.2

1.0

0.7

1.2

1.4

1.5

Ten-year government bond yield (%, end of period)

1.5

1.0

0.3

0.5

1.0

1.0

Exchange rate (Per US Dollar, end of period)

29.2

32.8

28.1

27.0

25.7

19.3

Nominal GDP ($bn, final year of period)

447

537

645

835

1,003

2,191

Population (millions, final year of period)

23

24

24

24

24

22

Indonesia

           

Real GDP

6.1

5.5

3.8

5.7

4.3

3.7

Inflation (%)

7.7

5.7

3.1

3.2

3.5

3.5

Ten-year government bond yield (%, end of period)

7.6

8.9

6.1

6.8

6.8

6.8

Exchange rate (Per US Dollar, end of period)

9,010

13,785

14,050

12,662

12,370

11,782

Nominal GDP ($bn, final year of period)

755

861

1,094

1,923

2,864

12,017

Population (millions, final year of period)

242

258

274

287

299

331

Thailand

           

Real GDP

3.8

3.0

1.6

4.3

2.0

1.7

Inflation (%)

3.0

2.0

0.3

1.0

1.0

1.0

Ten-year government bond yield (%, end of period)

3.7

2.5

1.2

1.8

1.8

1.8

Exchange rate (Per US Dollar, end of period)

30.1

36.0

30.0

26.5

25.0

16.7

Nominal GDP ($bn, final year of period)

341

401

502

763

934

2,375

Population (millions, final year of period)

67

69

70

70

70

66

Sources: IMF, National Sources, Capital Economics


Emerging Europe

Fast return to pre-crisis trend, but medium-term challenges persist

  • The legacy of the coronavirus crisis is likely to be much smaller in Emerging Europe than in many other parts of the world. But once the effects of the crisis fade, poor demographics and interventionist policymaking in Russia and Turkey will weigh on medium-term growth.
  • The recovery from the slump in output is likely to be relatively quick by past standards; macro vulnerabilities that preceded the 2009 global financial crisis have been addressed and policy support in Central Europe has helped to prevent long-term scarring. The legacy of the current crisis in the form of weakened balance sheets will be smaller than in most other EMs.
  • In Central and Eastern Europe, we expect demand to recover quickly. Governments have sustainable debt dynamics that allow for fiscal policy to remain loose and countries may benefit from a shift towards near-shoring as firms reassess supply chain linkages after the crisis. What’s more, EU fund inflows from the recovery package and the 2021-27 budget will be worth 2-3% of GDP per year, which will support investment. (See Chart 69.) We think that real GDP will have returned to its pre-crisis trend within the next few years. (See Chart 70.)
  • Russia’s recovery is likely to be sluggish. The government will stay committed to maintaining the strength of its balance sheets given that fiscal buffers are viewed as a strategic objective to withstand the effects of shocks. Social spending may become a bigger priority, but the postponement of the National Projects until 2030 will slow the process of upgrading the country’s ageing infrastructure.
  • What’s more, constitutional amendments that allow President Putin to rule until 2036 will sap the life out of any serious reforms to address the structural factors weighing on Russia’s growth prospects. Worsening relations with the West and the growing role of the state in the economy will only add to these concerns. And to compound matters, the crisis is likely to bring forward “peak oil demand” by around a decade. This will weigh on real oil prices (see Chart 71.), growth and profit opportunities.
  • Turkey’s recent shift towards more orthodox economic policymaking, if sustained, will help to restore macro stability. Even so, the state’s role in the economy will probably continue to expand, leading to a misallocation of resources and weaker foreign investment. All of this will weigh on productivity growth. (See Chart 72.)
  • Over a longer horizon, demographic trends and productivity growth will dominate the outlook. Low income levels mean that there is plenty of scope for catch-up across the region. (See Chart 73.) Turkey’s working age population will continue to rise, albeit at a slower pace. (See Chart 74.) A political shift would address some of the country’s structural issues, supporting productivity growth and income convergence.
  • Poor demographics in Russia and Central Europe will weigh on growth. Populations are set to fall further and an increasing share of over 65s will weigh on the size of the labour force. (See Chart 75.) Governments have started to address the squeeze by introducing measures to raise fertility and stem the flow of net migration. (See Chart 76.) Governments will also need reforms to utilise the ageing labour stock, including by raising the retirement age.
  • But these policies will take time, and, in the meantime, growth will depend on productivity. Economies in Central Europe are better placed to take advantage of investment into new manufacturing processes and technologies such as robotics and electric vehicles.

Emerging Europe Charts

Chart 69: EU Structural & Recovery Funds
(2021-27, % of GDP, CE Estimates)

Chart 70: Central & Eastern Europe Real GDP
(Index, 2019 = 100)

Chart 71: Nominal & Real Oil Price Forecasts

Chart 72: Productivity (% y/y, 2021-30, Avg.)

Chart 73: GDP Per Capita (PPP, 2019, US = 100)

Chart 74: Working-Age Population (% y/y, Avg.)

Chart 75: Population Aged 65+ (% of Working Age Pop.)

Chart 76: Net Migration
(2013 – 2017, % of Population in 2012)

 

Sources: Refinitiv, UN, ILO, World Bank, EC, Capital Economics

Table 14: Emerging Europe Key Forecasts (% y/y, period averages, unless otherwise stated)

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Emerging Europe

           

Real GDP

3.1

2.5

1.7

3.3

2.2

2.1

Inflation (%)

8.7

7.0

6.1

5.8

6.2

5.2

Russia

           

Real GDP

3.7

1.6

0.5

2.4

1.4

1.5

Inflation (%)

10.3

8.7

4.3

3.8

3.2

3.0

Ten-Year Government Bond Yield (%, end of period)1)

8.0

14.1

5.8

5.8

5.5

5.3

Russian ruble per US Dollar (end of period)

31

73

74

69

69

71

Nominal GDP ($bn, final year of period))

1,633

1,356

1,517

2,139

2,717

6,478

Population (millions, final year of period)

143

145

146

145

144

136

Turkey

           

Real GDP

3.3

7.1

3.2

3.8

3.0

3.1

Inflation (%)

8.7

7.9

12.5

12.2

14.4

10.6

Turkish lira per US Dollar (end of period)

1.5

2.9

7.4

13.2

21.7

68.7

Nominal GDP ($bn, final year of period))

775

863

696

844

1,156

4,796

Population (millions, final year of period)

72

79

84

86

89

97

Poland

           

Real GDP

4.8

3.0

3.0

3.8

2.5

2.0

Inflation (%)

2.9

1.7

1.8

2.7

2.6

2.5

Ten-Year Government Bond Yield (%, end of period)1)

6.2

2.5

1.2

1.8

4.0

4.0

Polish zloty per US Dollar (end of period)

3.0

3.9

3.7

3.3

3.2

2.7

Nominal GDP ($bn, final year of period))

479

477

586

952

1,244

3,601

Population (millions, final year of period)

38

38

38

38

37

33

Czech Republic

           

Real GDP

2.6

1.7

1.4

4.0

2.4

1.8

Inflation (%)

2.9

1.5

2.3

2.6

2.4

2.3

Czech koruna per US Dollar (end of period)

18.7

24.9

21.5

19.3

18.9

15.2

Nominal GDP ($bn, final year of period))

209

188

240

399

515

1,441

Hungary

           

Real GDP

0.0

2.1

2.2

4.1

2.4

1.7

Inflation (%)

5.4

2.2

2.4

3.0

3.0

2.8

Hungarian forint per US Dollar (end of period)

207

291

296

263

255

226

Nominal GDP ($bn, final year of period))

131

125

148

244

330

900

Sources: IMF, National Source, Capital Economics


Latin America

Long-lasting damage

  • Latin America will suffer more prolonged damage from the pandemic than other parts of the world. And even once the effects of the current crisis fade, the long-term prospects in the region are worse than in most other EMs.
  • COVID-19 will leave a damaging economic legacy in Latin America, especially from higher public debt. (See Chart 77.) For Chile and Peru, which have strong public finances, that’s not an issue for now. For others, such as Brazil and Argentina, public debt is on an altogether more precarious trajectory.
  • In the near term, most governments are likely to turn to austerity. But political appetite for this is unlikely to last. Brazil’s government may resort to financial repression (e.g. leaning on banks to hold more debt) to manage its fragile balance sheet. That could crowd out private sector credit, resulting in a misallocation of resources and lower potential growth.
  • Meanwhile, Argentina will probably need yet another sovereign debt restructuring later this decade. And amid high joblessness and inequality, it’s difficult to imagine that the government will push through the difficult structural reforms which are needed to push inflation into the single digits. (See Chart 78.)
  • More generally, the relative inflexibility of labour and product markets (see Chart 79.) in the region will prevent resources currently utilised in hard-hit sectors (e.g. tourism) from being fully redeployed in more productive sectors (e.g. online retail).
  • As a result, we think that Latin America’s GDP in the 2020s will fare about as badly as it did during the Great Depression in the 1930s and the ‘lost decade’ of the 1980s. (See Chart 80.)
  • Further ahead, the growth outlook is dim. Ageing populations mean that the tailwind from favourable demographics is fading. Latin American employment will probably stabilise in the late-2040s. (See Chart 81.) Employment growth will be particularly weak in Colombia and Chile, while Brazil’s workforce looks set to shrink after 2030. (See Chart 82.)
  • This will leave economic growth increasingly dependent on productivity gains in the region, which we expect to be muted. There’s a risk that the prolonged closure of schools during the pandemic will compound problems in weak education systems, making it harder to upgrade skills in the labour force. Moreover, national savings are low across Latin America, particularly in Brazil, which will hamper investment in more efficient technologies.
  • Otherwise, moves globally to mitigate climate change will have mixed impacts on the region. Chile and Peru should benefit from a shift towards green energy sources, which we expect to boost copper prices. (See Chart 83.) But a shift away from fossil fuels will have a damaging impact on oil producers such as Colombia, Ecuador and Venezuela.
  • Assuming that it successfully navigates the transition away from the (already-weak) oil sector, Mexico could be a regional outperformer. It is likely to enjoy the spillover effect of technological progress in the US. And its competitive manufacturing sector will probably benefit from the decoupling between the US and China. Coming alongside its more favourable demographics, this means that Mexico could overtake Brazil as the largest economy in the region by 2050.
  • Overall, in per capita terms, we think that GDP in Chile and Peru will converge with the US, while Mexico’s will broadly stagnate over the coming decades. Meanwhile, Brazil, Argentina and Colombia’s economies will head backwards relative to the US. (See Chart 84.)

Latin America Charts

Chart 77: Public Debt (% of GDP)

Chart 78: Consumer Prices (% y/y, T = peak)

Chart 79: WEF Scores of Product & Labour Market Competitiveness (2019, Rank out of 141 Countries)

Chart 80: Latin America Real GDP
(Pre-Crisis Year T = 100)

Chart 81: Latin America Employment

Chart 82: Employment Growth (% y/y, Annual Average)

Chart 83: Real Copper Price & Chile and Peru GDP

Chart 84: Real GDP Per Capita (% of US, 2019 PPP)

 

Sources: Refinitiv, WEF, Maddison Project Database, UN, USGS, CE

Table 15: Latin America Long Term Forecasts (% y/y, period averages, unless otherwise stated)

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Latin America1

           

Real GDP

3.7

2.4

-0.6

3.6

2.4

2.1

Inflation (%)

4.5

5.0

4.1

3.6

4.1

4.3

Brazil

     

 

   

Real GDP

4.5

1.2

-0.6

2.8

2.4

1.5

Inflation (%)

4.7

6.7

4.6

3.7

4.0

4.0

Ten-year government bond yield (%, end of period)2

12.4

16.5

7.0

7.0

8.3

9.3

BRL/USD (end of period)

1.7

4.0

5.2

5.6

5.7

7.2

Nominal GDP ($bn, final year of period)

2,208

1,796

1,397

1,770

2,380

5,550

Mexico

 

 

 

 

 

 

Real GDP

1.6

3.0

-0.3

4.1

2.5

2.7

Inflation (%)

4.4

3.6

4.2

3.9

4.7

5.0

Ten-year government bond yield (%, end of period)2

67.0

6.3

5.3

5.3

7.0

8.5

MXN/USD (end of period)

12.3

17.3

19.9

19.4

21.4

31.0

Nominal GDP ($bn, final year of period)

1,058

1,170

1,070

1,701

2,251

6,887

Argentina

 

 

 

 

 

 

Real GDP

5.1

1.5

-2.8

3.5

2.3

1.7

Inflation (%)

18.4

27.5

38.1

34.2

21.4

14.5

ARS/USD (end of period)

4.0

12.9

84.1

380.4

613.2

5,238

Nominal GDP ($bn, final year of period)

425

642

401

388

710

1,609

Colombia

 

 

 

 

 

 

Real GDP

4.5

4.7

0.4

3.9

2.2

1.7

Inflation (%)

4.7

3.3

4.2

2.9

3.4

3.8

COP/USD (end of period)

1,920

3,175

3,421

3,646

3,699

4,565

Nominal GDP ($bn, final year of period)

287

293

275

400

500

1,170

Chile

 

 

 

 

 

 

Real GDP

3.8

3.9

0.3

4.2

2.6

2.3

Inflation (%)

3.7

3.4

2.8

3.0

3.0

3.3

CLP/USD (end of period)

468

709

711

663

649

667

Nominal GDP ($bn, final year of period)

218

244

243

409

550

1,591

Peru

 

 

 

 

 

 

Real GDP

6.9

4.8

0.1

6.7

3.2

3.1

Inflation (%)

2.8

3.3

2.3

2.6

3.4

3.5

PEN/USD (end of period)

2.8

3.4

3.6

3.3

3.2

3.3

Nominal GDP ($bn, final year of period)

149

191

198

331

462

1,632

Sources: Refinitiv, UN, ILO, IMF, Capital Economics; 1) Latin America GDP excludes Venezuela; Latin America inflation Argentina & Venezuela; 2) Local-Currency


Middle East and North Africa

Peak oil demand to hinder Gulf, North Africa to benefit from near-shoring

  • The current crisis will accelerate the move to peak oil demand, which will weigh on incomes in the Gulf and prompt a shift towards more flexible exchange rate regimes. We are more optimistic on the prospects for North Africa.
  • The positive news on COVID-19 vaccines has brightened the economic outlook and the main beneficiaries will be the UAE and North Africa, where sectors vulnerable to social distancing are largest. (See Chart 85.) But the limited fiscal support provided so far means that it will take time for demand to fully recover. The effects of the crisis on the region’s supply potential will probably be small, although any reallocation of resources may be hindered by inflexible labour and product markets.
  • The crisis will accelerate technological and behavioural changes that were already underway and, as a result, oil demand is likely to peak towards the end of this decade. As low-cost producers, the Gulf states will remain key players in the energy market but they will find it increasingly difficult to manipulate supply and boost prices for any length of time. Oil policy will shift to protecting market share and output may be ramped up to ensure that natural resources are fully utilised before they become redundant. Real oil prices are likely to fall over the coming decades. (See Chart 86.)
  • Efforts to diversify economies and raise productivity in non-hydrocarbon sectors will probably struggle to make sufficient headway. The other Gulf countries will not be able to replicate the UAE’s non-oil development over the past twenty decades. Saudi Arabia’s Vision 2030 reform plans fall short in several key areas and so we don’t think that it will unlock significantly faster growth. Diversification in the rest of the Gulf will be slow-going.
  • The result is that some form of adjustment will eventually be required. Large FX savings (see Chart 87.) mean that, initially, policymakers will rely on keeping fiscal policy tight and pushing more nationals into private sector jobs. This will require nationals to lower their wage demands relative to migrant workers which currently make up the bulk of private sector employees.
  • Further out, though, we think that policymakers will decide to ditch dollar pegs and move to more flexible exchange rate regimes. Predicting the precise timing and nature of such a move is extremely difficult but our working assumption is that this begins in the mid-2030s. The overall result, though, is that incomes in the Gulf will diverge compared with the US. (See Chart 88.)
  • Outside of the Gulf, the growth outlook is supported by favourable demographic trends. Working-age populations will rise at a robust pace (see Chart 89.) and we expect participation rates to increase from their current low levels.
  • Low income levels (see Chart 90.) provide plenty of scope for catch-up growth and the trend towards more orthodox policymaking as well as steady economic reforms will support a rise in savings and investment rates from current low levels. (See Chart 91.) The North African economies have all the ingredients to establish themselves as manufacturing hubs and Morocco is already making strides by attracting investment into the automobiles sector. (See Chart 92.) These economies stand to gain from a shift towards near-shoring.
  • The upshot is that income convergence will be faster in the coming decades than over the past ten years, but we think that many countries will suffer slower catch-up than the best-performing EMs did at a similar stage of development.

Middle East and North Africa Charts

Chart 85: Sectors* at Risk of Social Distancing
(% of GDP)

Chart 86: Oil Prices (Brent, $pb)

Chart 87: Sovereign Wealth Fund Assets and
Foreign Exchange Reserves

Chart 88: GDP per Capita (PPP 2019 Prices, % of US)

Chart 89: Working Age Population (%, Period Avg.)

Chart 90: GDP per Capita (2020, % of US)

Chart 91: Investment (2019, % of GDP)

Chart 92: Car Production (2019, mn)

 

Sources: CEIC, Refinitiv, World Bank, OICA, Capital Economics

Table 16: Middle East and North Africa Key Forecasts (% y/y, period averages, unless otherwise stated)

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Middle East and North Africa

      

Real GDP

4.5

4.4

0.2

4.5

3.7

3.7

Inflation (%)

6.8

4.5

4.0

3.6

3.5

3.8

Saudi Arabia

      

Real GDP

2.8

5.2

-1.1

4.0

2.4

2.0

Inflation (%)

5.3

3.2

-0.5

2.2

2.3

3.3

SAR/USD (end of period)

3.8

3.8

3.8

3.8

3.8

4.7

Nominal GDP ($bn, final year of period)

528

654

741

1,004

1,267

2,912

Population (millions, final year of period)

27.4

31.7

34.8

37.2

39.3

44.6

Egypt

      

Real GDP

6.2

2.9

4.1

5.6

5.8

5.8

Inflation (%)

11.5

9.4

14.4

5.8

5.1

4.5

EGP/USD (end of period)

5.8

7.8

15.7

20.0

21.0

22.2

Nominal GDP ($bn, final year of period)

225

317

357

486

778

5,171

Population (millions, final year of period)

82.8

92.4

102.3

111.7

120.8

160.0

UAE

      

Real GDP

2.5

5.2

-0.2

4.8

2.9

0.8

Inflation (%)

7.0

1.8

0.6

2.7

2.7

3.3

AED/USD (end of period)

3.7

3.7

3.7

3.7

3.7

4.6

Nominal GDP ($bn, final year of period)

290

358

375

538

707

1,280

Population (millions, final year of period)

8.5

9.3

9.9

10.3

10.7

10.4

Morocco

      

Real GDP

5.0

4.0

0.9

6.3

5.0

4.5

Inflation (%)

2.2

1.2

1.1

2.0

2.9

3.3

MAD/USD (end of period)

8.3

9.9

8.9

8.1

7.7

7.0

Nominal GDP ($bn, final year of period)

93

101

114

196

304

1,498

Population (millions, final year of period)

32.3

34.7

36.9

39.0

40.9

46.2

Sources: CEIC, Refinitiv, Capital Economics


Sub-Saharan Africa

Weak institutions, climate change to compound COVID-19 legacy

  • Many African economies will suffer long-term damage from the coronavirus crisis. And while the region should experience fast growth over the longer-term, rises in per capita incomes – and income convergence with DMs – will be extremely slow.
  • The fiscal cost of the current crisis will cast a cloud over the medium-term outlook for Nigeria and South Africa. Public debt ratios in both countries are on unsustainable upwards trajectories. Fiscal policy will remain tight, holding back the recovery in demand.
  • We suspect that the Nigerian authorities will shift further towards unorthodox policy to deal with this, including deficit monetisation and tighter capital controls. In South Africa, the government will probably lean on banks to hold more debt. In both cases, these policy responses would weigh on potential growth.
  • The fiscal legacy may be smaller in some of the other parts of the region. Debt restructurings may occur in the near term. While that has raised fears that sovereigns will face reputation risks that lock them out of global capital markets for some time, academic research suggests that the premium on defaulters’ debt tends to fade within a few years. (See Chart 93.)
  • Further ahead, rapid population change should drive fast GDP growth rates. Demographic change in Africa will take place on a scale exceeding that elsewhere in the world. High birth rates suggest the region’s population will overtake those of China and India by the middle of the century. (See Chart 94.) On the UN’s projections, close to 70% of the increase in the global working-age population by 2050 will come from Africa. (See Chart 95.)
  • While populations across most of SSA are rising quickly, the region is experiencing a very slow demographic transition – the process during which falling birth rates increase the share of the population that is of working-age (as happened particularly markedly in China from the 1970s). (See Chart 96.)
  • This will prevent savings and investment from rising significantly. Other factors will also hold back investment and productivity, including weak institutions and a lack of integration within Africa. And there is little chance of a rapid, dramatic reform process of the kind that boosted growth in China. Weak productivity will limit income growth. Indeed, despite rapid rates of GDP growth, we expect that incomes in the region will hardly converge with those in the US. (See Chart 97.)
  • At a country level, the size of Nigeria’s economy should pull further ahead of South Africa’s. (See Chart 98.) That, of course, assumes that Nigeria is able to rebalance its economy away from oil. This challenge will be even more daunting in Angola, which has few non-oil industries and is likely to experience severe relative decline. Mining economies in Central Africa, by contrast, stand to gain if the increased use of electric vehicles boosts demand for copper, cobalt, and other minerals. (See Chart 99.)
  • African economies face among the biggest costs from climate change (see Chart 100.), including via reduced agricultural productivity, disruptive climate-induced migration, and extreme weather events. And the region lacks the resources to invest in mitigation strategies. The economic costs will probably become much larger in the second half of this century.

Sub-Saharan African Charts

Chart 93: Premium on Sovereign EMBI US$ Bond Spreads After Defaults (bp)

Chart 94: Population (mn)

Chart 95: Increase in Working-age* Population
(2020 to 2050, Millions)

Chart 96: Working-age* Population
(% of Total Population)

Chart 97: Sub-Saharan Africa* GDP per Capita (% of US, Market Exchange Rates)

Chart 98: GDP ($bn, Market Exchange Rates)

Chart 99: Commodity Exports
(% of GDP, 2019)

Chart 100: Effect on Real GDP of 3°C Rise in Global Temp. From Current Temperatures by 2100 (%)

 

Sources: UN, IMF, World Bank, National Sources, Capital Economics

Table 17: Sub-Saharan Africa Key Forecasts (% y/y, period averages, unless otherwise stated)

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Sub-Saharan Africa

      

Real GDP

5.9

4.6

1.5

4.7

5.4

5.0

Inflation (%)

10.0

8.3

10.7

8.8

7.7

6.3

Nigeria

      

Real GDP

8.2

4.7

0.3

3.2

5.2

5.0

Inflation (%)

10.3

9.7

13.8

12.8

10.5

8.5

Exchange rate (Nigerian naira per US dollar, end of period)

152

199

395

959

1,226

3,067

Nominal GDP ($bn, final year of period)

367

481

423

371

617

3,310

South Africa

      

Real GDP

3.1

2.2

-1.0

3.7

3.0

2.2

Inflation (%)

6.8

5.4

4.7

3.8

4.4

4.5

Ten-year government bond yield (%, end of period)1

8.1

9.8

8.8

9.5

9.5

9.5

Exchange rate (South African rand per US dollar, end of period)

6.6

15.5

14.7

15.7

16.3

22.4

Nominal GDP ($bn, final year of period)

376

317

293

446

618

1,694

Angola

      

Real GDP

8.5

4.5

-2.0

3.0

4.4

3.7

Inflation (%)

13.2

9.8

23.8

15.3

14.0

9.9

Exchange rate (Angolan kwanza per US dollar, end of period)

93

135

655

1,227

1,635

6,465

Nominal GDP ($bn, final year of period)

84

116

65

75

137

466

Kenya

      

Real GDP

4.9

5.5

4.4

7.1

6.0

4.9

Inflation (%)

12.8

8.6

5.9

4.8

4.1

3.7

Exchange rate (Kenyan shilling per US dollar, end of period)

81

102

109

107

110

115

Nominal GDP ($bn, final year of period)

40

64

96

170

273

1,408

Ethiopia

      

Real GDP

11.0

10.1

7.4

8.6

8.2

6.5

Inflation (%)

18.5

7.4

13.7

11.3

8.4

6.2

Exchange rate (Ethiopian birr per US dollar, end of period)

17

21

39

53

63

88

Nominal GDP ($bn, final year of period)

27

63

95

164

303

2,535

Ghana

      

Real GDP

6.4

7.0

5.5

6.4

5.6

4.9

Inflation (%)

11.8

11.8

11.4

8.4

7.6

6.5

Exchange rate (Ghanaian cedi per US dollar, end of period)

1.5

3.8

5.9

7.9

9.0

15.4

Nominal GDP ($bn, final year of period)

43

48

69

104

172

903

Sources: ILO, IMF, National Sources, Refinitiv, Capital Economics; 1) Local-Currency


Commodities

COVID-19 to hasten peak oil demand

  • We think that measures to contain COVID-19 and the subsequent green-intensive fiscal response have accelerated the move towards less oil-intensive GDP growth. (See Chart 101.)
  • More specifically, we forecast that global oil demand will peak around 2030. (See Chart 102.) We still believe that non-OECD oil demand will continue to grow until the early 2030s, though we expect that the rate of oil consumption growth will weaken in the years ahead. We suspect that COVID-19 has made a medium-term economic slowdown in China even more probable given the further expansion of the state’s role in the economy. What’s more, COVID-19 has added to the economic headwinds facing many other emerging economies in the medium term.
  • On the supply side, we reckon that there is little prospect of a shortage of oil in the medium-to-long term. After all, the greater flexibility associated with shale production in the US means that the sort of imbalances that historically emerged in the oil market are now much less likely. Furthermore, in a world of falling demand, it is likely that the low-cost producers, such as Saudi Arabia and Iraq, will be the last ones standing.
  • Bringing it all together, we expect that declining demand, ample supply and lower marginal costs will progressively weigh on oil prices, such that the real price of Brent crude oil will fall to $35 per barrel by 2050. (See Chart 103.)
  • Turning to metals, we think that COVID-19 will accelerate many of the structural shifts that were already in motion before the pandemic. The two key shifts from the perspective of metal demand are the phasing out of fossil-fuelled vehicles in favour of electric vehicles (EVs) and the structural slowdown in China’s economy.
  • Indeed, while China’s policy response in the wake of COVID-19 has proved extremely effective in lifting near-term demand, another wave of state-mandated investment will only cement China’s structural problems firmly in place. As a result, we anticipate that economic growth in China will slow significantly later this decade, which in turn will drag on growth in demand for metal.
  • Meanwhile, stimulus packages announced by policymakers around the world to combat the downturn in economic activity have included fresh EV incentive schemes (notably in France and Germany), and extensions of existing schemes (such as in China). As EVs contain more copper and aluminium per unit compared to conventional vehicles, this should serve to shift the typical path of consumption upwards. (See Chart 104.) What’s more, EVs typically contain more copper than aluminium, which helps to explain, at least in part, why we expect copper prices to hold up better than those of aluminium.
  • Elsewhere, the long-term outlook for agricultural commodity prices is particularly uncertain, given that climate change has ramifications for supply. Our forecast for wheat assumes somewhat lower growth in supply, but this is at least in part due to softer growth in demand.
  • In fact, slower global population growth and rising real incomes are likely to lead to only sluggish growth in demand for staple foods more broadly. And in the case of wheat, we expect the real price to fall from the mid-2020s.

Commodities Charts

Chart 101: Oil Demand & GDP Growth (% y/y)

Chart 102: Global Oil Demand (Mn. BpD)

Chart 103: Nominal & Real Brent Oil Prices
(US$ per Barrel)

Chart 104: Stylised Path of Aluminium Consumption

 

Sources: IEA, Refinitiv, Capital Economics

Table 18: Commodities Key Long-Term Forecasts (period averages, unless otherwise stated)

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Nominal Oil Price (US$ per barrel)

75

97

56

59

62

74

Real Oil Price (US$ per barrel)

98

112

57

55

51

42

Nominal Oil Price (% y/y)

11.5

-3.7

-1.3

7.6

1.6

1.2

Real Oil Price (% y/y)

8.4

-6.1

-3.3

5.2

-1.3

-1.7

Nominal Copper Price (US$ per tonne)

6,711

7,295

5,950

7,060

8,020

13,650

Real Copper Price (US$ per tonne)

8,717

8,389

6,100

6,470

6,390

7,430

Nominal Copper Price (% y/y)

21.3

-5.4

3.1

3.7

3.6

3.2

Real Copper Price (% y/y)

18.2

-7.7

0.7

1.3

0.7

0.3

Nominal Aluminium Price (US$ per tonne)

2,326

1,960

1,830

1,750

1,720

2,780

Real Aluminium Price (US$ per tonne)

3,031

2,252

1,880

1,610

1,370

1,520

Nominal Aluminium Price (% y/y)

6.1

-4.8

0.9

-0.8

2.8

2.6

Real Aluminium Price (% y/y)

3.3

-7.1

-1.4

-3.1

-0.1

-0.3

Nominal Wheat Price (USc per bushel)

509

643

485

530

570

700

Real Wheat Price (USc per bushel)

660

739

497

510

460

380

Nominal Wheat Price (% y/y)

15.6

-0.7

2.8

0.0

1.4

1.9

Real Wheat Price (% y/y)

12.6

-3.2

0.4

-2.3

-1.5

-1.0

Sources: Refinitiv, Capital Economics


Ten Risks to the Global Outlook


Rankings

Table 19: World Rankings* by Nominal GDP at Market Exchange Rates

 

Ranked by Nominal GDP
($bn, final year of period)

Country

Nominal GDP

($bn, 2050)

Nominal GDP
Per Capita

($, 2050)

Nominal GDP
Per Capita

(% of US, 2050)

Real GDP

(% y/y, Average 2031-2050)

 

2019

2050

Top 10

1

1 🡢

United States

98,614

259,909

100

2.3

2

2 🡢

China

80,126

57,135

22

1.8

5

3 🡡

India

49,951

30,473

12

5.0

4

4 🡢

Germany

14,920

186,255

72

1.6

3

5 🡣

Japan

13,373

125,984

48

0.7

6

6 🡢

UK

13,181

173,328

67

1.7

16

7 🡹

Indonesia

12,017

36,314

14

3.7

7

8 🡣

France

9,512

140,732

54

1.3

10

9 🡡

Canada

7,905

171,607

66

2.3

14

10 🡡

Australia

7,754

213,191

82

2.9

 

12

11 🡡

South Korea

7,741

165,292

64

1.6

Selected Other Economies

15

12 🡡

Mexico

6,887

44,387

17

2.7

11

13 🡣

Russia

6,478

47,591

18

1.5

35

14 🡹

Vietnam

6,143

56,048

22

4.6

8

15 🡻

Italy

5,798

101,953

39

0.8

9

16 🡻

Brazil

5,550

24,238

9

1.5

37

17 🡹

Egypt

5,171

32,328

12

5.8

30

18 🡹

Philippines

4,862

33,650

13

4.4

19

19 🡢

Turkey

4,796

49,480

19

3.1

38

20 🡹

Bangladesh

4,459

23,155

9

4.6

13

21 🡻

Spain

4,266

97,765

38

0.8

22

22 🡢

Poland

3,601

107,500

41

2.0

17

23 🡻

Netherlands

3,326

193,778

75

1.4

29

24 🡹

Nigeria

3,310

8,247

3

5.0

18

25 🡻

Saudi Arabia

2,912

65,343

25

2.0

33

26 🡹

Malaysia

2,736

67,460

26

3.0

20

27 🡻

Switzerland

2,658

263,407

101

1.6

52

28 🡹

Ethiopia

2,535

12,342

5

6.5

25

29 🡣

Sweden

2,438

214,076

82

2.0

40

30 🡹

Pakistan

2,390

7,072

3

3.9

*of the 58 economies with long run forecasts by Capital Economics

Sources: Refinitiv, United Nations, Capital Economics

Table 19: World Rankings* by Nominal GDP at Market Exchange Rates (Continued)

 

Ranked by Nominal GDP
($bn, final year of period)

Country

Nominal GDP

($bn, 2050)

Nominal GDP
Per Capita

($, 2050)

Nominal GDP
Per Capita

(% of US, 2050)

Real GDP

(% y/y, Average 2031-2050)

 

2019

2050

 

23

31 🡻

Thailand

2,375

36,011

14

1.7

Selected Other Economies

21

32 🡻

Taiwan

2,191

97,770

38

1.0

28

33 🡻

Norway

1,954

296,048

114

2.1

24

34 🡻

Belgium

1,879

153,720

59

1.1

34

35 🡣

South Africa

1,694

22,432

9

2.2

44

36 🡹

Peru

1,632

40,418

16

3.1

26

37 🡻

Argentina

1,609

29,322

11

1.7

39

38 🡡

Chile

1,591

78,312

30

2.3

50

39 🡹

Morocco

1,498

32,442

12

4.5

31

40 🡻

Singapore

1,497

233,663

90

1.8

41

41 🡢

Czech Republic

1,441

136,589

53

1.8

51

42 🡹

Kenya

1,408

15,379

6

4.9

42

43 🡣

Romania

1,390

84,907

33

1.6

56

44 🡹

Tanzania

1,285

9,931

4

6.4

27

45 🡻

UAE

1,280

122,749

47

0.8

36

46 🡻

Colombia

1,170

20,909

8

1.7

32

47 🡻

Hong Kong

994

123,408

47

2.0

54

48 🡹

Myanmar

952

15,293

6

4.2

55

49 🡹

Ghana

903

17,352

7

4.9

48

50 🡣

Hungary

900

105,787

41

1.7

57

51 🡹

Uganda

887

9,913

4

6.4

43

52 🡻

Portugal

747

82,263

32

1.0

49

53 🡣

Ukraine

702

19,789

8

1.5

58

54 🡡

Mozambique

654

10,011

4

8.1

 

47

55 🡻

Algeria

639

10,483

4

2.4

 

45

56 🡻

Greece

627

69,470

27

0.9

 

46

57 🡻

Qatar

483

125,385

48

1.6

 

53

58 🡻

Angola

466

6,014

2

3.7

*of the 58 economies with long run forecasts by Capital Economics

Sources: Refinitiv, United Nations, Capital Economics


Detailed Forecasts

Table 20: Population (Final year of period, millions)

   
 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

       

Advanced Economies

      

US

309

321

331

340

350

379

Japan

129

127

126

123

120

106

Euro-zone

333

337

339

340

340

333

– Germany

81

82

84

84

83

80

– France

63

64

65

66

67

68

– Italy

59

61

60

60

60

57

– Spain474747474644

UK

63

65

67

69

71

76

Canada

34

36

38

39

41

46

Australia

22

24

26

27

29

36

       

Emerging Asia

      

China

1,369

1,407

1,439

1,458

1,464

1,402

India

1,234

1,310

1,380

1,445

1,504

1,639

Indonesia

242

258

274

287

299

331

S. Korea

50

51

51

51

51

47

Thailand

67

69

70

70

70

66

Philippines

94

102

110

117

124

144

       

Emerging Europe

      

Russia

143

145

146

145

144

136

Turkey

72

79

84

86

89

97

Poland

38

38

38

38

37

33

Czech Republic

11

11

11

11

11

11

       

Latin America

      

Brazil

196

204

213

219

224

229

Mexico

114

122

129

135

141

155

Argentina

41

43

45

47

49

55

Colombia

45

48

51

52

53

56

       

MENA

      

Saudi Arabia

27

32

35

37

39

45

Egypt

83

92

102

112

121

160

UAE

9

9

10

10

11

10

Morocco

32

35

37

39

41

46

       

Sub-Saharan Africa

      

Nigeria

159

181

206

233

263

401

South Africa

51

55

59

63

66

76

Angola

23

28

33

38

45

77

Kenya

42

48

54

60

66

92

       

Sources: UN, Capital Economics

Table 21: Productivity (% y/y, Average)

   
 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

       

Advanced Economies

      

US

1.3

0.8

1.3

1.8

1.7

2.0

Japan

0.1

0.7

-1.2

1.9

1.4

1.7

Euro-zone

0.4

0.6

-0.6

1.9

1.2

1.5

– Germany

0.3

0.7

-0.2

2.0

1.7

1.8

– France

0.4

0.6

-1.2

2.1

1.0

1.3

– Italy

-0.4

-0.6

-1.4

1.7

0.4

1.0

– Spain1.50.9-1.62.00.71.0

UK

0.3

0.6

-1.6

3.0

1.6

1.4

Canada

0.1

1.0

0.2

1.5

1.3

1.9

Australia

0.6

1.4

-0.1

1.6

1.4

1.8

       

Emerging Asia

      

China

10.1

6.3

4.6

5.2

3.1

2.5

India

8.2

5.2

5.1

4.9

4.5

3.8

Indonesia

3.3

4.0

1.9

4.4

3.2

3.0

S. Korea

3.7

1.4

1.4

3.2

2.5

2.5

Thailand

2.9

3.0

1.5

4.4

2.3

2.3

Philippines

2.2

3.8

2.2

5.9

3.6

3.3

       

Emerging Europe

      

Russia

3.2

1.4

2.2

2.0

1.5

1.9

Turkey

0.7

3.5

2.3

1.9

1.4

2.5

Poland

2.2

2.3

3.7

3.5

2.5

2.6

Czech Republic

2.1

0.9

1.4

3.3

2.3

2.3

       

Latin America

      

Brazil

2.8

0.0

0.6

0.5

1.7

1.6

Mexico

-0.3

0.9

-1.1

1.9

1.3

2.1

Argentina

3.3

0.4

-2.3

0.9

1.1

1.1

Colombia

1.6

1.8

1.3

1.2

1.3

1.4

       

MENA

      

Saudi Arabia

-1.7

-0.7

-3.1

2.4

0.8

1.3

Egypt

2.2

2.4

2.1

2.7

2.6

3.3

UAE

-11.9

3.8

-0.9

4.8

2.9

1.9

Morocco

2.9

3.5

0.0

4.1

2.8

2.9

       

Sub-Saharan Africa

      

Nigeria

5.5

2.0

-2.5

0.3

2.2

2.5

South Africa

1.4

0.6

-2.4

2.3

1.7

1.5

Angola

4.6

0.9

-5.4

-0.7

0.8

0.5

Kenya

1.8

2.1

1.1

4.0

3.4

3.0

       

Sources: Refinitiv, Capital Economics

Table 22: Inflation (%, Average)

   
 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

       

Advanced Economies

      

US

2.2

1.7

1.8

2.4

2.6

3.0

Japan

-0.1

0.7

0.4

0.3

0.5

0.5

Euro-zone

1.9

1.4

1.0

1.0

1.7

2.0

– Germany

1.6

1.5

1.2

1.3

1.8

2.0

– France

1.7

1.2

1.1

1.3

1.8

2.0

– Italy

2.0

1.6

0.6

1.1

1.8

2.0

– Spain2.51.20.81.21.62.0

UK

2.7

2.3

1.7

1.9

2.4

2.6

Canada

1.7

1.7

1.6

2.1

2.4

2.4

Australia

3.0

2.3

1.5

1.6

1.9

2.5

       

Emerging Asia

      

China

3.0

2.8

2.2

1.5

1.5

1.5

India

8.7

8.2

4.5

4.3

4.0

3.7

Indonesia

7.7

5.7

3.1

3.2

3.5

3.5

S. Korea

3.0

1.9

1.1

1.0

1.8

2.0

Thailand

3.0

2.0

0.3

1.0

1.0

1.0

Philippines

4.9

3.0

2.9

2.9

3.0

3.0

       

Emerging Europe

      

Russia

10.3

8.7

4.3

3.8

3.2

3.0

Turkey

8.7

7.9

12.5

12.2

14.4

10.6

Poland

2.9

1.7

1.8

2.7

2.6

2.5

Czech Republic

2.9

1.5

2.3

2.6

2.4

2.3

       

Latin America

      

Brazil

4.7

6.7

4.6

3.7

4.0

4.0

Mexico

4.4

3.6

4.2

3.9

4.7

5.0

Argentina

18.4

27.5

38.1

34.2

21.4

14.5

Colombia

4.7

3.3

4.2

2.9

3.4

3.8

       

MENA

      

Saudi Arabia

5.3

3.2

-0.5

2.2

2.3

3.3

Egypt

11.5

9.4

14.4

5.8

5.1

4.5

UAE

7.0

1.8

0.6

2.7

2.7

3.3

Morocco

2.2

1.2

1.1

2.0

2.9

3.3

       

Sub-Saharan Africa

      

Nigeria

10.3

9.7

13.8

12.8

10.5

8.5

South Africa

6.8

5.4

4.7

3.8

4.4

4.5

Angola

13.2

9.8

23.8

15.3

14.0

9.9

Kenya

12.8

8.6

5.9

4.8

4.1

3.7

       

Sources: Refinitiv, Capital Economics

Table 23: Policy Interest Rate (%, End of Period)

   
 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

       

Advanced Economies

      

US

0.25

0.50

0.13

0.25

1.50

4.00

Japan

0.10

0.10

-0.10

-0.10

-0.10

-0.10

Euro-zone

1.00

0.05

0.00

0.25

1.00

2.00

UK

0.50

0.50

0.10

0.10

1.00

2.75

Canada

1.00

0.50

0.25

0.75

1.25

3.25

Australia

4.75

2.00

0.10

0.25

1.00

2.50

    

 

  

Emerging Asia

   

 

  

China

2.25

2.20

2.00

1.50

0.50

India

6.25

6.75

4.00

4.25

5.00

5.00

Indonesia

6.50

7.50

3.75

5.00

5.00

5.00

S. Korea

2.50

1.50

0.50

1.75

2.50

2.50

 

   

 

  

Emerging Europe

   

 

  

Russia

5.00

11.00

4.25

4.75

4.25

4.25

Turkey

7.50

17.00

12.00

16.00

9.00

 

   

 

  

Latin America

   

 

  

Brazil

10.75

14.25

2.00

4.50

6.00

7.00

Mexico

4.50

3.25

4.25

4.25

6.00

7.00

Argentina

38.00

30.00

22.50

13.00

    

 

  

MENA

   

 

  

Saudi Arabia

2.00

2.00

0.50

2.25

4.00

5.00

Egypt

8.25

9.25

8.25

7.50

9.00

8.50

 

   

 

  

Sub-Saharan Africa

   

 

  

Nigeria

6.25

11.00

11.50

14.50

14.50

12.50

South Africa

5.50

6.25

3.50

5.00

6.50

6.50

       

Sources: Refinitiv, Capital Economics