GDP

Long term forecasting is, in many people’s view, about as accurate as putting your finger in the air and taking a guess.

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Nevertheless, it is far from a fruitless exercise. If nothing else it makes us step back from the everyday pressures of business and look at the bigger picture, try to assess long-term trends and fundamental changes that are taking place that can largely pass us by on a day-to-day basis.

It also encourages us to look at our business and make judgements as to how well our current model would fit in a variety of future global scenarios. So reviewing the Economist Intelligence Unit’s latest report looking at the long-term forecast up to 2050 has much to commend it.

Emerging Markets Emerge

The report is available on download free from the EIU here and merely requires a registration. The report opens with an attention grabbing comparison of the top ten economies at market exchange rates by 2050 as predicted by the EIU.

Source: The Economist Intelligence Unit

Source: The Economist Intelligence Unit

Crucially faster growing emerging markets move up into the first , thrid and fourth slots as the old order, relatively speaking, falls back on slower growth. Demographics, of course, plays a part with aging populations in Europe and Japan limiting growth potential and the reverse in places such as India, Indonesia and Mexico driving growth in gross domestic product if challenging the ability of those countries to rapidly improve GDP per capita.

Asia Tops Growth

Regionally, Asia will rise to a little over 50% of global GDP, a trend that started in the last century with Japan and South Korea and has accelerated with China, India and Indonesia among others expansion in this.

Source: The Economist Intelligence Unit

Source: The Economist Intelligence Unit

This graph illustrates the rise of Asia as the focus of global growth that is so often mentioned in the media, but so challenging for small and medium enterprise western firms to re-position themselves to exploit.

Source: The Economist Intelligence Unit

Source: The Economist Intelligence Unit

On the topic of global influence, by 2050 China and India will, relatively speaking, both be larger than the next five economies below them. We can expect both countries to play a much greater role in global affairs both economically and on issues such as climate change and maybe even security – an area neither have shown more than limited regional interest in to date.

Source: The Economist Intelligence Unit

Source: The Economist Intelligence Unit

The EIU makes some profound observations on population growth, saying much of the global growth in recent decades has been driven by population growth. Long-term population estimates, however, reveal that growth in the global population is expected to see a dramatic decline from an average of 1.3% in the 1980-2014 period to 0.5% across the 2015-50 period.

Law of Large Numbers

The slowdown in the growth rate of the global working-age population will be even starker, with a drop to 0.3% in the 2015-50 period, compared with an average growth rate of 1.7% in the 1980-2014 period. For those countries, particularly in the Middle East and Africa, with still-rapidly rising populations there should be better growth prospects but this also represents a source of political instability if these regions cannot create employment and prosperity. Much will depend on the continuation of globalization and on the policies pursued by the specific countries concerned.

The Advantage of Being Advanced

For those countries with an already declining labor force the challenge will be to achieve growth by other means and to maintain social stability as the burden of taxation falls on a progressively smaller section of societies.

Source: The Economist Intelligence Unit

Source: The Economist Intelligence Unit

Advanced economies will, however, continue to represent very significant markets, with their residents continuing to enjoy some of the highest per capita incomes in the world even if, nationally, the country falls in the GDP rankings. Governments, and the populations that elect them, will be forced to reevaluate their place in the world and what role they should seek, indeed be able to, maintain. Arguably, it would be better to forge a more inclusive world order now then to have a change of roles forced on us by events over the coming decades.

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The only US rare earths miner may miss a payment deadline today, President Obama signed an extension of funding for the Highway Trust Fund for just two more months and US economic growth actually contracted in the first quarter.

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Rare earths miner Molycorp is expected to announce it will skip a $32.5 million loan payment today, triggering a 30-day grace period that could lead to a bankruptcy filing before the end of June, the Wall Street Journal reported, attributing the information to people familiar with the matter.

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In 2010, after Molycorp — formerly a unit of Chevron Corp. — was sold to private-equity firms in 2008 for $80 million— the company was able to raise $394 million in a public offering. Around that time, China tightened existing quotas on rare-earths exports in a bid to rein in overproduction and keep more supply available for domestic manufacturer and prices soared.

Since 2011, however, rare-earths prices have been on a long slide downward. Now with a market capitalization of around $150 million, Molycorp is indebted and unprofitable. Customers are putting in orders, but the company hasn’t met production targets at its Mountain Pass, Calif., mine and is in restructuring talks with firms representing its creditors.

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An interesting post in the FT by a leading economist examines the growing concern that seven years after the financial crisis and the use of unprecedented stimulus measures and extended near-zero interest rates,the world may be stuck in a long-term trend of low growth.

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The author, Gavin Davis, is not to be dismissed as just another academic, he was head of the global economics department at Goldman Sachs from 1987-2001, and served as an economic policy adviser to the British government in addition to being an external adviser to the British Treasury.

Chinese, Japanese Growth Down

Global growth is unquestionably slowing.

The three largest independent economies are all struggling to achieve strong growth. Chinese activity dipped sharply last month, and the estimated rate of growth is now 5.3%, well below the government’s 7% target for the 2015 calendar year leading many to hope yet another stimulus is on the way, but so far we have not seen much more than a relaxation in lending and reductions in interest rates.

Japanese growth remains weak in spite of Abenomics. Remarkably, after recessions in parts of the Eurozone the only major economy showing some resilience is the EU where overall growth could be approaching 1.8% in spite of excessive austerity measures.

Davis cites a colleague’s research that tracks two measures of US activity used to summarize the “state of the economic cycle.”

The Slow Normal

According to his models, the probability that the economy is now in a state of strong expansion has dropped from 70% in December 2014 to under 40% now. Over the same period, the probability that the economy is in recession has risen from zero to 14% – still low he admits, but not entirely negligible.

The expectation is that US growth will rebound in Q2 but will not be enough to raise 2015 growth as a whole and could well result in a downgrade for the year as a whole. It’s hard to see China, the engine of growth for the last ten years or more, suddenly creating the level of demand that will significantly lift global GDP in the next few years.

US Growth Nearly Halted

In the US, the official GDP growth rate in Q1 was only 0.2%, while Davis’ model of underlying activity is showing 1.8%. This may, as in some previous years, be more down to a weak first quarter due to weather but the real worry is that the rate of productivity growth is slowing and with it the potential for a long-term rise in living standards and, hence, growth. The long-term growth rate of the US economy has fallen from 3.3% in 2003 to 2.3% now.

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It almost seems counter-intuitive, but when poor growth results come out of China there can often be a mini rally in prices as investors bet poor growth will necessarily mean more stimulus by Beijing.

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As a recent article in the Telegraph newspaper noted, the final figures for 2014 suggest China will probably turn in a 7.4% growth rate for last year, the lowest since 1990. Not surprisingly iron ore, coal and copper – commodities for which China is by far the world’s largest consumer – have all fallen in 2014. Take iron ore for example, slowing demand and rising supply have resulted in prices falling by 47% last year to $71 per ton now.

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The last reason China’s screwed? Absolute population. (Read the Top 3 Reasons in Part One here.) The number of Chinese is likely to peak at below 1.4 billion sometime after 2020. Today, there are four Chinese for every American. By the end of the century, that ratio could fall to between 1.9 and 1.25, according […]

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Some would argue the super-cycle is already over and in terms of double-digit growth, it almost certainly is. But even Chinese growth of 7% today is sucking up commodities at a faster rate than 10-12% was in 2007, simply because it is 7% of a much bigger GDP number. Miners have taken heart from recent […]

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Read the first part of this post here.  Would the US, Britain, or Japan change policy at the request of foreign powers because the foreign powers were, relatively, not doing as well? I don’t think so, especially if that meant lower support for exporters and industry, stoking inflation, and boosting internal consumption when the economy […]

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What do you do when the US government shutdown prevents data releases? Start quoting Benjamin Disraeli. That’s exactly what Bill Strauss, chief economist at the Federal Reserve Bank of Chicago, resorted to doing during his keynote speech at Day One of our conference, Commodity/PROcurement EDGE. As Disraeli said, “there are lies, damn lies and statistics,” […]

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How advanced is advanced manufacturing, really? Perhaps the real question is, will advanced manufacturing advance the economy overall, and contribute enough to make US industries sustainable in our global environment? Alright, enough advancement. Let’s take a look at a recent NPR article’s take on Chicago ­­– the fair city we publish from – and its […]

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In Part One, we began looking at the decline in interest-rate spreads between sovereign bonds of vulnerable countries and German Bunds. Moving to GDP, in the fourth quarter of last year, Eurozone aggregate gross domestic product was still 3 percent below its pre-crisis peak, while US GDP was 2.4 percent above it. In the same period, […]

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