The global economy in 2075: Growth slows as Asia rises

Goldman Sachs Research has updated its long-term global economic forecast, extending the projection horizon to 2075 and expanding coverage to 104 economies.

• This marks the third iteration of the study, following initial projections in 2000 (coined by Jim O'Neill) and a major update a decade ago.
• The primary objective is to strip out cyclical volatility to focus on structural drivers like population growth, capital accumulation, and productivity trends.

Global demographic trends are identified as a primary driver of decelerating economic growth over the coming decades.

• Global population growth has declined from roughly 2% per year 50 years ago to approximately 1% currently.
• Population growth is projected to reach zero over the next 50 years and potentially decline by the end of the century.
• The estimated peak global population is now revised downward to 10 billion, earlier than previous projections of exceeding 11 billion.
• Shrinking populations necessitate significant adjustments for pension sustainability and address the challenges of population aging.

Income convergence between emerging markets (EMs) and developed economies is expected to remain a robust trend, though the pace varies by country.

• Low-income economies, particularly in emerging markets, continue to exhibit faster GDP and income growth compared to high-income economies.
• This convergence is projected to reduce global income inequality over time, contradicting narratives that globalization has increased global disparity.
• However, within-country inequality has risen in the majority of developed economies, presenting a policy challenge for distributing the benefits of globalization.

China's economic trajectory is characterized by a sharp projected slowdown due to demographic headwinds, despite a continued expectation that it will overtake the US.

• China's population has reached its peak level, and the labor force is set to contract for the next 15 to 20 years regardless of current birth rate policies.
• While China's per capita GDP growth will slow, it remains estimated at approximately 4% annually, roughly double the US rate.
• Goldman Sachs projects China to overtake the US as the world's largest economy by 2035.
  • This timeline reflects a revision from previous optimism that placed the crossover in the late 2020s.
  • The projection aligns with the original 2000 forecast timeline, despite China's GDP having already grown from 12% of US GDP in 2000 to 80% currently.

India is identified as a key long-term growth engine, positioned for massive economic expansion over the next two decades.

• India's growth is driven by favorable demographics and a recent acceleration in productivity convergence.
• Unlike China, India does not face immediate population decline and is expected to continue growing faster than its neighbor.
• The projection suggests India will eventually catch up to the US and China by 2075.

Historical accuracy of long-term forecasts shows mixed results regarding specific economies, though the broader trend of rising EM importance held true.

• Forecasts correctly anticipated the dominance of India and China, with China's growth even surpassing initial expectations.
• Projections were overly optimistic regarding Brazil and Russia, particularly over the last decade.
• In the first decade of the initial projections, forecasts for EM growth were too conservative.

Key risks to the long-term outlook include protectionism and climate change.

• The rise of nationalism and protectionism poses a threat to the continued pace of globalization, which has slowed but not yet reversed.
• Climate change presents a significant long-term threat to low-income, high-population emerging economies with limited financial capacity to adapt.

The study suggests that over long-term horizons, economic and financial market growth will increasingly shift outside of developed economies.

• Investors are advised to look beyond the last decade of exceptional US financial market growth when formulating long-term portfolios.
• Corporates represent the primary audience for these projections, utilizing them to plan market entry and long-term expansion strategies.

Productivity growth has slowed over the last decade, correlating with a deceleration in globalization and global trade growth.

• This trend is identified as a significant structural factor shaping future global growth.
• Forecasting productivity remains inherently difficult over extended time horizons compared to demographic trends.