The World in 2024

Wed 09 Oct 2019

Recently, we were asked by our management committee to answer a deceptively simple question: what will the world look like in 2024 from an economic perspective?

The task was daunting: articulating a cohesive world view, years ahead.

To do that, we need to step back and look at the world we created at the dawn of the nuclear age.

The end of two world wars ushered in the Pax Americana for the west, a liberal empire of soft economic power, as opposed to one of hard military power, predominantly in the east. In the west, countries were manufacturing goods for American consumers. In exchange for influence, America would share its growth with the world. The structure made sense. The system still rewarded the clear winner of the world wars that had just ended but did not impose the military demands which had caused the demise of its predecessor, the British Empire.

Familiar as these stories might be, they are also now three generations old. The world with the American consumer at its centre has effectively finished its course. By the end of the next decade it is anticipated that 39% of consumption will come from Asia, as opposed to 7% from the US. Already real incomes have all but stagnated in the west for the last 20 years, even as they have doubled in the east in the past 10. We built a system to reward economic prowess, insofar as it came from the same source as the military one, if only to ensure that the west would happily accept American leadership which should act as an attractive alternative to communist regimes. Now, in a world where growth and military strength are not necessarily in the same place, the integrity of the post-WWII system is being seriously tested.

This is the big force behind the trajectory of the global economy today. The rebalancing between the east and the west. In a truly free and open economy, the torch would have been passed from the west to the east. But the west is not prepared to go quietly into that good night. Western countries still control all major multilateral institutions, including the IMF, WTO, World Bank, etc. Militarily, the US is outspending the next 7 powers combined.

More importantly, Asian consumers may be powerful, but underpinning the global economy is the almighty Dollar, and the central bank behind it.

Both east and west have weaknesses. As growth rates lowered, the west increasingly used debt to finance its way of life. It has now reached a point where that debt is hamstringing growth. With less growth to go around, post war alliances based on sharing wealth begin to break down.

In the east, things are no better. It is true that with 2/3 of the world population is in South-East Asia, growth has a natural home there. But China’s transition into a consumption economy is happening in a forced manner. For only the second time in history is a country of that size forced to change its economic focus, from the secondary (manufacturing) to the tertiary (services) sector in a very short space of time. The first time was also China, more than half century ago. It’s “great leap forward”, from the primary (agriculture) to the secondary economy cost an approximate 58 million lives, or one in twenty people, from the ensuing famine. This time around things are not quite so dramatic, but the transition has weakened China’s value as the world’s marginal buyer, especially of capital goods, slowed growth, hurt economies exporting into China and overall disrupted global trade.

The trade wars, the tug of war we have been experiencing for the last two years, are one of the many expressions of those frictions and imbalances we just described.

The global economy is slowing, cyclically and structurally. No big secret there. But economics is called the ‘dismal science’ for a reason.

Economists tend to see two types of systems. Those that don’t work, and are thus problematic, and those that do work, but are in a constant danger from entropy, a universal Murphy’s law predicting that systems are doomed eventually. What they often fail to see, is how these systems purge, adapt, how some factors catalyse evolution and transform systems into their next iteration.

In a slow growing world, well into the next five years, one that is going through the necessary pains of transformation, the business winners will be not those who wait for lower-hanging fruit, but those who accept that the post WWII system is changing.

For those who do move to change, there are pockets of growth to be found. AI will add $15.7 trillion to the global economy by 2030, this is equivalent of over five times the UK’s GDP. The renewable energy market will have risen to $1.5 trillion by 2025, almost double what it was just two years ago. Demographically, 65% of the world’s middle class will live in Asia in 2030, up from 17% today. This presents opportunities for firms who can expose themselves to this shift, whilst navigating the changing trade landscape. Challenges don’t just come from trade wars, the regulatory cost of GDPR is $16 billion and this is in addition to the $2 billion from MiFID II.

Winners will be the bigger companies as slower growth will increase mortality rate of start-ups and compel others to merge with the bigger players. Investors need to identify which mega-trends, such as green energy, AI or the Blockchain will change our future. They also need to ask the right questions: how will the regulatory regimes change as multilateral institutions wane? Can the world handle a non-Dollar centric economy? Will it be replaced by a more multi-currency regime, or is a new super-currency to ascend?

Predicting the exact nature of change is impossible. But we have to view the current growth slowdown as an effect from transitioning from an old system into a newer iteration.