CHIEF ECONOMIST NEWSLETTER Global economy adjusts to ‘slow-fast world’

Wayne Best

January 9, 2017 - Technological advances and adoption in the world are moving at lightning speed, yet the global economy is approaching five years of sub-par growth, the longest stretch of time over the last three decades that growth has been below 3 percent. So why the paradox between the slow and the fast?

Several things are happening. First, the rate of global urbanization, which has led to rapid economic development and prosperity in the past, peaked in 2013 and is now on a slowing trend. Second, the world is getting older. In fact, the median age of the world’s population crossed the 30-year mark in 2016, with half of the world’s population now over the age of 30.

Population growth no longer boosts GDP the way it once did

Prior to 2008, during the peak years of globalization, gross domestic product (GDP) growth in the world’s top industrialized nations was solid and population growth added over half a percentage point per year to GDP growth.

Average real GDP growth rates

Source: Visa Business & Economic Insights analysis of Oxford Economics data

The next five years will be a different story. Older age groups have become a much larger part of the total population globally—higher than at any time in history—and their growth is accelerating.

Global Population (By age group)

Source: UN World Population Prospects 2015

In recent years, working-age populations peaked in two of the world’s three largest economies: China (in 2014) and the Eurozone (in 2010). Nearly half of the world’s countries will see a steady decline over the next decade in the share of their working-age populations.

Demographic winds are shifting for half the world

Blue countries denote aging markets

Source: Visa Business and Economic Insights analysis of World Bank/Haver data

Age has an impact on the economy and growth in consumer spending because people’s economic needs and contributions vary over their life cycle. Economies with a larger share of youth or elder populations face slower growth than those with a larger share of working-age populations^1.

Finding new sources of growth

Finding alternative opportunities for growth in this new economic reality will be essential in the years ahead. Financial inclusion is one area of promise, especially in developing nations where large segments of the population live without access to banking, credit and other financial services. This can have serious adverse implications for economic growth. Countries with younger populations could see a demographic boost to growth, especially as financial inclusion efforts broaden access to financial services. Cash and check conversion to credit represents a nearly $9 trillion opportunity in the global economy. Card penetration varies widely from countries that have already reached saturation, to others where the card market is just starting to take off.

Consumer card share of merchant spending (Percent)

Visa Business and Economic Insights analysis of data from Euromonitor Merchant Segment Study

Global consumer spending patterns are also changing. Mass urbanization has caused a rise in mega cities (more than half are located in Asia), which now account for large concentrations of spending and spending power. Today, about one in every eight dollars of consumer spending globally is spent in a mega city. This has implications for the rest of the world, because these cities are becoming more tightly integrated than ever before through air travel. As new routes are laid and new capacity added, this lift in air connections will eventually support the significant growth in cross-border travel that is expected. (Visa’s recent study, “Mapping the future of global travel and tourism,” is available at visa.com/travelinsights).

Rapid digital disruptions are changing the economic landscape

Although the global economy remains stuck in low gear, the world is changing faster than ever. The digital revolution is causing major disruptions across many industries, including home entertainment. Analog technology, such as the video cassette recorder and DVD, defined home entertainment for more than 30 years, but it took less than a decade for home internet access to displace it. Spending on movie downloads and streaming subscriptions in the U.S. have now topped purchases and rentals of DVDs for the first time last year—and are expected to nearly double by 2019 as physical home video revenues continue their downward trajectory. So far the digital disruption has remained largely confined to the virtual world, but for how long?

Could a similar disruption occur in the oil industry—one of the most important commodities to the global economy?

With more people concentrated in dense metro areas, a growing share of the population is opting out of owning a car. The use of lighter composite materials in car manufacturing combined with the advancement of electric vehicle technology could boost fuel efficiency further over the coming decades. Collectively, digital disruption, technological advancement and slowing growth could cut global oil demand by about a third, with oil prices remaining lower for longer (Brent crude could average around $50 per barrel in 2017²).

New “slow-fast” economy creates growth uncertainty

The spread and uptake of technology will continue to transform traditional industrial paradigms. More disruptions will cause new upheaval and churn in the economy—old technologies will be discarded as new technologies emerge. The inherent tension between digital disruptions and the slower dynamics that drag on economic growth (population trends, urbanization) has created a new economic reality that we call the “slow-fast economy.”

It’s still unclear how conflicting dynamics in this new global economy will be resolved. Sluggish economic growth is expected to continue throughout the coming year. However, if new (yet unforeseen) growth can emerge from this slow-fast tension, there may yet be hope for a more robust future global economy.

Wayne Best, Senior Vice President/Chief Economist

Wayne Best leads Visa’s Business and Economic Insight team. As chief economist, he keeps close watch on emerging opportunities in the trillion-dollar payments industry. An active participant in the World Economic Forum’s Future of Consumption community, he identifies economic trends shaping the future. Best’s presentations and reports explain the impact of these trends to company and client executives, as well as government leaders around the globe. Before joining Visa in 1990, Best worked as a consultant performing cost benefit analyses for the power industry. In addition to an MBA, Best holds a degree in nuclear engineering and has participated in the Stanford University and Kellogg School of Management executive programs.

Sources

Any unattributed statements or assertions are based on Visa Business and Economic Insights analysis of industry data and forecasts, including Oxford Economics, United Nations World Population Prospects and PricewaterhouseCoopers LLP.

¹ Bloom and Canning, “Global Demographic Change: Dimensions and Economic Significance,” NBER Working Paper 10817.

² Scheitrum, Jaffe, Fulton, Changing Oil Market Fundamentals and the Implications for OPEC Production Strategy.

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*Researched, by Euromonitor International plc for its client, Visa Inc. and its subsidiaries using industry standards. Euromonitor disclaims and excludes any and all liability for any loss suffered by any party as a direct or indirect result of the use of any of the extracts.

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