What we really know about the global economy

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What is going to happen to the world economy? We will never know the answer to this question. In one decade after another, something big and largely unexpected has occurred: the great inflation and oil shocks in the 1970s, the disinflation of the early 1980s, the fall of the Soviet Union and the rise of China in the 1990s, the financial crises in the high-income economies in the 2000s and the pandemic, post-pandemic inflation and wars in Ukraine and the Middle East in the 2020s. We live in a world of conceivable and obviously consequential risks. Some — war among nuclear great powers — could be devastating. The difficulty is that low-probability, high-impact events are nearly impossible to forecast.

Yet we also know of some big features of our global economy that are not really uncertain. These must also stay in our minds. Here are five of them.

The first is demography. The people who will be adults two decades hence have all been born. The people who will be over 60 years old four decades from now are already adults. Mortality could jump, perhaps because of a terrible pandemic or a world war. But, barring such a catastrophe, we have a good idea of who will be living decades from now.

Several features of our demography are quite clear. One is that fertility rates — the number of children born per woman — have been falling just about everywhere. In many countries, notably China, fertility rates are far below replacement levels. Meanwhile, the highest fertility rates are in Sub-Saharan Africa. As a result, its share in global population might jump by 10 percentage points by 2060. (See charts.)

These demographic changes are the result of rising longevity, the transformation in the economic, social and political roles of women, urbanisation, the high costs of parenthood, improvements in contraception and changes in how people judge what is worthwhile in their lives. Only huge shocks could conceivably change any of this.

A second feature is climate change. Maybe current trends will be turned around in time. But emissions of greenhouse gases have barely stabilised, while the world continues to get hotter as stocks of these gases in the atmosphere continue to rise. It is a good bet that it will continue to do so for a long time. If so, temperatures are sure to rise by far more than 1.5C above pre-industrial levels, which, we have been told, is the upper limit of reasonable safety. We will have to work harder to mitigate emissions. But we will also have to invest heavily in adaptation.

A third feature is technological advance. Progress in renewable energy, especially the declining cost of solar energy, is one example. Advances in life sciences are another. But, in our age, the revolution in information and communications technologies is the centre of such progress. In The Rise and Fall of American Growth, Robert Gordon of Northwestern University has persuasively argued that the breadth and depth of technological transformation has slowed, almost inevitably, since the second industrial revolution of the late 19th and early 20th centuries. Transport technology, for example, has changed rather little in half a century.

Nevertheless, the transformation in information processing and communication has been astounding. In 1965, Gordon Moore, who went on to found Intel, argued that “with unit cost falling as the number of components per circuit rises, by 1975 economics may dictate squeezing as many as 65,000 components on a single silicon chip”. That was right. But astoundingly, Moore’s eponymous law continues to be true almost half a century later. In 2021, the number of such components was 58.2bn. This permits marvels of data processing. Moreover, 60 per cent of the world’s population used the internet in 2020. Further transformation of how we live and work must follow from this. The development and use of artificial intelligence is the latest example.

A fourth feature is the spread of knowhow across the world. The developing regions of the world that have proved most adept at absorbing, using and furthering such knowledge are in east, south-east and south Asia, which contain roughly half of the world’s population. Developing Asia also continues to be the world’s fastest-growing region. Given the ability — and the opportunity — to catch up, it is a safe bet that this will continue. The centre of gravity of the world economy will continue to shift in the direction of these regions. That will inevitably create political shifts. Indeed, it already has. China’s rapid economic rise is the big geopolitical fact of our era. In the long term, India’s rise is likely to have large global consequences, too.

A fifth feature is growth itself. According to the updated work of the late Angus Maddison, as well as the IMF, the world economy has grown in every year since 1950, except 2009 and 2020. Growth is an inherent feature of our economy. The World Bank’s recent Global Economic Prospects notes that what looms ahead in 2024 is “a wretched milestone: the weakest global growth performance of any half-decade since the 1990s, with people in one out of every four developing economies poorer than they were before the pandemic”. Nevertheless, even in this shock-affected period, the world economy has grown, even if unequally across countries and people, and unevenly over time. We are not moving into an era of global economic stagnation.

It is easy to be overwhelmed by short-term shocks. But the urgent must not be allowed to overwhelm our awareness of the important. In the background, the big forces described above will reshape our world. While improving our capacity to respond to shocks, we must pay them very careful attention.

martin.wolf@ft.com

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