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 five trends that will reshape our world.
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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A rising global middle class
Merrill Lynch sees a critical demographic shift is the continuing mass migration from rural to urban environments. Although the gulf between rich and poor will remain wide in many regions, the net result of this movement into cities will be an expanding global middle class. According to the Global Trends 2030 report, within 20 years a majority of the world’s population will, for the first time in history, have risen out of poverty. By conservative estimates, the number middle class people will likely double to 2 billion by 2030.
This will produce disruptions as radical as those wrought by the Industrial Revolution in the 18th century, it said. A disproportionate amount of that middle-class expansion will occur in developing and frontier markets, and those nations will account for an even larger portion of global economic growth.
Spending by middle-class consumers in North America and Europe is expected to rise by just 0.6% per year over the next 20 years, while middle-class consumption in Asia is expected to increase by 9% annually. If developing countries are perceived as having more promising opportunities for middle-class growth, that could attract the skilled workers necessary for further prosperity.
Food and water security
A growing middle class will place unprecedented strain on the planet’s resources. With higher household incomes, more people will eat meat more often. As protein-heavy diets become more prevalent, demand for food and water will increase.
“It takes 15,000 liters of water to produce a kilogram of beef. It takes 1,500 liters to produce a kilogram of grain,” Nahal said. “And this puts increasing pressure on global food security and water security.” If current trends continue, within 30 years water demand will exceed water supply by 40%.
The problem will only be worsened if global temperatures continue to rise, and if the extreme weather cycles predicted by many climate scientists threaten crop yields. By the end of August 2012, 65% of the continental U.S. was in a state of moderate to exceptional drought. As of November 2012, the average global temperature in each of the previous 333 consecutive months has been higher than the 20th-century average.
According to Nahal’s team’s calculations, if the status quo remains and no efficiency gains are made, the world’s diminished freshwater supply could cut the forecast for 2050 global GDP almost in half.
But as with all these large trends, the issues of food and water security will create opportunities for innovative problem solvers. Says Nahal, “Water today is probably a $500 billion market." We think that’s going to grow to $1 trillion by 2020.” This will include new technologies and new infrastructure that allow for more efficient treatment and re-use of water, both residentially and industrially.
Do such long-term forecasts factor in to the advice you offer your clients? Sound off in the comments.