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News : Global Economy Last Updated: Jan 19, 2015 - 3:01 PM

Global growth at risk of long-term slowdown says study
By Michael Hennigan, Finfacts founder and editor
Jan 16, 2015 - 1:00 AM

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Over the past 50 years, global economic growth was exceptionally rapid. The world economy expanded sixfold. Average per capita income almost tripled. Hundreds of millions of people were lifted out of poverty. Yet unless we can dramatically improve productivity, the next half century will look very different. The rapid expansion of the past five decades will be seen as an aberration of history, and the world economy will slide back toward its relatively sluggish long-term growth rate (chart above).

The problem is that slower population growth and longer life expectancy are limiting growth in the working-age population. For the past half century, the twin engines of rapid population growth (expanding the number of workers) and a brisk increase in labour productivity powered the expansion of gross domestic product. Employment and productivity grew at compound annual rates of 1.7% and 1.8%, respectively, between 1964 and 2014, pushing the output of an average employee 2.4 times higher. Yet this demographic tailwind is weakening and even becoming a headwind in many countries.

The net result is that employment will grow by just 0.3% annually during the next 50 years, forecasts a new report from the McKinsey Global Institute (MGI)—'Global growth: Can productivity save the day in an aging world?' Even if productivity growth matches its rapid rate during the past half century, the rate of increase in global GDP growth will therefore still fall by 40%, to about 2.1% a year (chart below). The McKinsey new normal would then be economic growth slower than it was during the past five years of recovery from the Great Recession and during the energy-crisis decade of 1974 to 1984. Per capita income and living standards, in both the developed and the emerging worlds, will rise more slowly.

The employment challenge

Global employment growth has been slowing for more than two decades. By around 2050, McKinsey's research finds, the global number of employees is likely to peak. In fact, employee headcounts are already declining in Germany, Italy, Japan, and Russia; in China and South Korea, they are likely to begin falling as early as 2024. While there is significant scope for policies that boost labour-market participation among women, young people, and those over the age of 65, that will be far from easy. Employment growth could double, to 0.6%, in the countries we studied: the G19 (the G20 without the European Union as a composite member) plus Nigeria—economies that account for 63% of the world’s population and 80% of global GDP. But that will happen only if each gender and age group, throughout these countries, closes the employment gap with the high-performing economies. In any case, even a doubling of employment growth won’t fully counter the erosion of the labour pool.

So productivity growth must drive the expansion of GDP in the longer term. Indeed, it would have to reach 3.3% a year—80% faster than its average rate during the past half century—to compensate fully for slower employment growth. Is this possible? Actually, McKinsey's case studies of five sectors (agriculture, automotive, food processing, healthcare, and retailing) found scope to boost annual productivity growth as high as 4%, more than enough to counter demographic trends.

The productivity solution

The world isn’t running out of technological potential for growth. But achieving the increase in productivity required to revitalise the global economy will force business owners, managers, and workers to innovate by adopting new approaches that improve the way they operate.

McKinsey's study found that about three-quarters of the potential productivity growth comes from the broader adoption of existing best practices, or catch-up improvements. The remaining one-quarter—counting only what we can foresee—comes from technological, operational, or business innovations that go beyond today’s best practices and push the frontier of the world’s GDP potential. Efforts to improve the traditionally weak productivity performance of the large and growing government and healthcare sectors around the world will be particularly important.

The study says business must play a critical role: aggressively upgrading capital and technology, taking risks by investing in R&D and unproven technologies or processes, and mitigating the labour pool’s erosion by providing a more flexible work environment for women and older workers, as well as training and mentorship for young people. In an environment of potentially weaker global economic growth, and definitely evolving growth dynamics, executives need to anticipate where the market opportunities will be and the competitors they will meet in those markets. "Above all, companies need to be competitive in a world where productivity will increasingly be the arbiter of success or failure."

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