Major economies face sluggish long-term growth

At the start of April 2023, the International Monetary Fund (IMF) projected 3% annual average growth for the global economy over the next five years. This was the organisation’s lowest forecast since 1990, with growth prospects seen as slowing everywhere except for India. Pictet Wealth Management’s own longer-term forecasts also see growth slowing,  with global GDP growth expected to average 3.1% over the next 10 years, a weak figure by historical standards. Among the reasons for this are the maturing of emerging economies, especially China, demographic issues and so-called ‘de-coupling’.

Among the major economies, we forecast annual GDP growth for the US to average 1.7% over the next decade. The clampdown on immigration under the Trump administration has been exacerbating labour shortages and fuelling inflation, adding to the effects of population ageing and depressing the US’s long-term growth prospects. However, we note reports that immigration is moving back towards pre-pandemic levels, while the labour force participation rate has started to increase as well.

We expect the US to maintain its technological lead across a range of cutting-edge industries, helped  by a well-embedded entrepreneurial ecosystem. We also see the US government moving towards an increasingly pro-active ‘industrial policy’, with the Biden administration’s ‘Inflation Reduction Act’ and ‘Chips Act’ (designed, respectively, to boost investments in clean tech and semiconductors) cases in point. While well-targeted subsidies could help bolster American industry, they could antagonise the US’s European allies even as rivalry with China continues to cast a pall over the global economy.

We expect the headline consumer price index in the US to come in at an annual average of 2.7% over the next 10 years, well above the 1.8% average in the years before covid. Yet we think we will remain fundamentally in a ‘soft money’ policy regime, meaning we do not expect the Federal Reserve to keep rates above long-term inflation. Our forecast is for the Fed funds rate to converge towards a level of 2.5% over the next 10 years.

Our 10-year annual growth forecast for the euro area economy is 1.5%. While the monetary union’s growth prospects are modest, it has shown an impressive ability to overcome the covid pandemic and withstand the fallout from the war in Ukraine. Initiatives like the Next Generation EU (NGEU) recovery fund and major investments in the energy transition and digital transformation could help offset the decline in the work-force. The euro area faces other challenges: the conflict in Ukraine is leading to calls to beef up defence capabilities, while European industry will remain highly vulnerable to renewed surges in energy prices. Supporting European industry in the face of increasingly aggressive competition from the US and China, and more generally protecting its interests in the strategic rivalry between these two powers, will be major issues for Europe.

We believe the NGEU is an important milestone in ensuring the long-term solidity of the EU, showing that a degree of fiscal solidity is possible in Europe. Efforts to reshape the euro area’s Growth and Stability pact could also pave the way for more effective fiscal policies in the years ahead. And we are encouraged by the progress made in avoiding a repeat of the euro debt crisis that culminated in 2012. Despite rises in the stock of debt triggered by the war in Ukraine and the pandemic and despite the rise in interest rates since 2022, we do not anticipate a renewed debt crisis in the foreseeable future.

We estimate that structural inflation in the euro area will average 2.3% over the next 10 years, up from 1.4% before the pandemic. We expect the European Central Bank’s deposit rate to converge to 2.5% over the coming decade.

China’s growth potential over the next 10 years is compromised by rapid ageing of the population, slowing urbanisation, de-globalisation and  us efforts to hem in China’s access to cutting-edge technologies as part of a sharp deterioration in the geopolitical backdrop. Housing-related activity could turn from being a driver of China’s growth to a drag. We now see Chinese GDP growing at an annual average of nearly 4% over the next 10 years, down from last year’s forecast of 4.6%, while we see annual inflation at about 3% (100 basis points higher than in the past 10 years).

We expect real GDP growth of 1% per year on average in Japan over the next decade, along with a gradual normalisation of Bank of Japan monetary policies. We feel that India may be able to reap a demographic dividend over the next decade: unlike Japan and China, its working-age population will continue to grow. We have therefore raised our forecast for Indian GDP growth to an annual average of 6.2% over the next 10 years.

Against this macroeconomic backdrop, we envisage a slow normalisation of fiscal and monetary policies that will occasionally lead to periods of financial instability. Although the era of broad-based government bailouts and monetary easing may be over, recent episodes –such as stress in the UK pension system and the US regional banking sector – suggest that governments and central banks will continue to intervene when financial stability is threatened. In particular, we believe central banks are likely to make a clear distinction between the need to ensure price stability (through higher policy rates) and financial stability (through liquidity backstops).

Note: For illustrative purposes only. There can be  no assurance that these projections, forecasts  or expected returns will be achieved.