Long-term economic forecasting is risky – and the longer the horizon the less likely a prediction is to transpire. But Merrill Lynch has thrown caution to the wind with its “Outlook 2031” report, highlighting four trends that it says will reshape our world.
In its latest issue of Merrill Lynch Advisor, the firm’s in-house publication for advisors and clients, the firm says that a handful of far-reaching and undeniable factors are likely to continue to shape our world for decades to come: an older world, income inequality, a greater demand for energy, a rising global middle class and food and water security.
These five factors – identified by BofA Merrill Lynch Global Research and Investment Management & Guidance teams – will present obstacles to global growth, but will also create opportunities for innovative thinking and new markets.
An aging world
As global life expectancies rise there has been a corresponding rise in the average age of the world’s population, especially in developed countries. Nations with aging populations generally suffer economically and become less globally competitive, while youthful countries tend to experience faster growth. By 2030, the median age in OECD wealthy countries is expected to jump to nearly 43, up from 38 in 2010. Already, the median age in Japan and Germany is past 45. In the US, where the median is 37, the aging baby-boom generation stands to imperil the nation’s fiscal stability.
For this reason, the report maintains, the so-called “frontier markets,” especially countries in Africa, are likely to experience the fastest economic growth over the next 20 years.
“The demographic issues that many emerging markets may encounter over the next 20 years are the same issues that the developed world is encountering now,” said Alberto Ades, head of emerging markets at BofA Merrill Lynch Global Research.
Over the past 20 years there has been an increasing disparity in wealth between the very rich and everyone else. In the US, the top 1% collects nearly a quarter of all income, and the top 10% takes home half – more than at any time since the pre-Depression 1920s, Merrill Lynch said. If this imbalance continues, or gets worse, recessions could last longer and recoveries could be less robust.
And it’s not just the developed world, and global income inequality around the world will have geopolitical implications including greater risk of unrest and heightened political instability. In China, the wealth imbalance is already a divisive and potentially volatile issue.
Christopher J. Wolfe, chief investment officer of Merrill Lynch Wealth Management Private Banking and Investment Group, said addressing this issue will require making changes in mandated entitlement programs such as Social Security, There will be a need to adjust policies to reduce the load on today’s workers, and allow their compensation to rise.
Exploding energy demand
While crude prices have dipped, in no small part due to the revolution in shale-gas extraction through hydraulic fracturing, concerns over greenhouse gas emissions, along with rocketing demand as global middle-class consumption increases, may force the world’s economies to find ways to lower their energy costs,
Sarbjit Nahal, head of sustainability megatrends analysis at BofA Merrill Lynch Global Research, estimates that world energy consumption will jump 50% over the next 20 years, causing higher oil and energy prices across the board. Today, the equivalent of about 9% of global GDP is spent on energy costs. “We simply think that’s not sustainable from a long-term perspective,” Nahal said. “The world cannot afford to be spending that amount of money on energy.”
He says this will require increasing reliance on non-fossil-fuel energy sources or improved efficiency.
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