The shifting global economic landscape

Over the last four decades (1978-2018), the world economy has more than trebled in real terms (it went from $2.6 to $8.3 trillion, at constant 2010 prices). Half of that increase was accounted for by population growth (from 4.3 to 7.6 billion) and the other half by economic gains (as average real per capita incomes increased from $6,140 to $10,880).

During the first two decades of that 40-year period, population increases contributed slightly more than half of the overall economic growth but population growth declined steadily through that whole period.

Overall, economic gains have compensated for the slower population growth to keep the global economy growing steadily but economic growth has fluctuated significantly – across time and geographies – resulting in major shifts in the global economic landscape. The 2008 global crisis had a noticeable impact on the most recent decade (2008-2018), which was compensated by strong growth in the decade prior to the crisis.

Economic gains have compensated for the slower population growth to keep the global economy growing steadily

Behind those aggregates there are many differences in the pace of economic and demographic growth—with major implications for the future of nations, markets and corporations. In this brief we will explore how the landscape has changed in terms of the national economies and their relative global weight and will also look at changes in the global corporate landscape (including the role of digital technology in reshaping it).

Population growth was strong overall through much of the 20th century (going from 1.7 to 4.5 billion between 1900 and 1980, as mortality rates declined faster than the adoption of contraception practices increased) and started decelerating rapidly in the 1980s. But both the growth and the deceleration played out very differently in different parts of the world.

These differences are clear when looking at population growth over the last four decades. The steady decline of global population growth masks the near-stagnation of biological population growth in Europe and Japan, a weakening of population growth in North America and China and strong continued growth in South Asia and Africa.  

As the table shows, population almost trebled in Sub-Saharan Africa over the last four decades and more than doubled in South Asia, the Middle East and North Africa. In China, population growth decelerated through the period, reflecting the combined impact of a one-child policy period and rapid urbanisation. 

The differing rates of population growth have resulted in unprecedented disparities in the population structure of countries around the world and will impact on social dynamics and the evolution of markets for goods and labour. How some of these impacts (including migration flows) will play out is hard to predict but they will be sweeping and will tend to increase the economic and geopolitical uncertainties that corporations will have to navigate.

Early in the 2020s the world will be inhabited by 8 billion people and this will roughly consist of:

• 2 billion young people (below age 15)
• 1 billion people aged at least 65
• 5 billion in ages between 15 and 64 (traditionally seen as the core working age period)

These shares of the population across age groups do not seem alarming … until we realise that the shares of the young and aged are meaningless averages.

26% of the world’s population is under age 15 and 9% is 65 or older

Looking in greater detail (based on actual data for 2017) the aggregates still appear to describe a reasonable demographic balance: 26% of the world’s population is under age 15 and 9% is 65 or older.

But these aggregates mask great differences: 

• In Japan, high-income European countries and in North America only 16% of the population is below age 15; while in South Asia and Sub-Saharan Africa the proportion is more than double that. 
• In Sub-Saharan Africa young people account for 43% of its billion population—quite a contrast with the quickly ageing Chinese population where only 18% of its 1.4 billion people are below age 15.

On the other side of the population structure the contrast is even greater: 19% of all the people in Japan, high-income Europe and North America are 65 or older while this segment of the population represents only 5% overall in South Asia and Sub-Saharan Africa (and in the latter only 3% belong to the older generation compared to 20% in high-income Europe).

In Sub-Saharan Africa young people account for 43% of its billion population

This amounts to a major imbalance. Fully half of the world’s youth lives in South Asia or Sub-Saharan Africa, even though these two large regions account for only 6% of the world’s economy (GDP in current USD). And 29% of the world’s population ages 65 and over lives in Japan, high-income Europe and North America, which account for only 13% of the world’s population but 55% of the world economy.

China deserves a separate comment because currently it is the country with the highest proportion (72%) of the population in the traditional working age bracket. This may well be one of the reasons why its economy has grown so rapidly over the last two decades but it will become a different story in coming decades as the proportion of old people grows relentlessly.

The large pools of young people in South Asia and Sub-Saharan Africa, the growing proportions of old people in Japan, North America and high-income Europe and the demographic shift taking place in China all will greatly affect consumer demand, availability of labour and other key factors shaping the global economic trajectory.

Fully half of the world’s youth lives in South Asia or Sub-Saharan Africa

Keeping a close eye on them will help understand the challenges and opportunities that evolving markets will present to any corporation. And regardless of its current geographical footprint no corporation is immune to global dynamics—with markets and supply chains having become fundamentally integrated (the ephemeral turbulence caused by Trumpian myopia notwithstanding).

Centres of gravity and labels

The global economy has grown significantly over the last several decades (at an average rate of nearly 3% per year in real terms) but it has fluctuated significantly—the 2008 global crisis having had a noticeable impact on the most recent decade (2008-2018), which was compensated by strong growth in the decade prior to the crisis.

Regardless of its current geographical footprint no corporation is immune to global dynamics

Behind those aggregates there are also many differences in the pace of economic growth resulting in significant shifts in the centres of gravity of the world economy. The landscape has changed in terms of major national economies and their relative global weight, with major implications for the future of markets and the opportunities for corporations.

Data are more comparable from 1992 on (after the break-up of the Soviet Union); peak years since then – with growth around 4% – were 2000, 2004, 2006 and 2010 (although the latter is less significant as it came after the only negative growth year in this period—2009 having borne the brunt of the recent global economic crisis).

Two labels that have had a lot of traction should now be considered obsolete: G7 and emerging markets. Concerning the G7 (Canada, France, Germany, Italy, Japan, UK and USA) the decline in its share of the global economy is one of the clearest indicators of structural change. 

Concerning emerging markets, it is worth a quick flashback to the history of the term and its predecessors. In a period that seems to be a long time ago but actually only ended thirty years back it was common (at least in “the West”) to refer to three worlds: the First world comprised advanced capitalist economies; the Second world comprised Communist countries; and the Third included everyone else.

Soon after the break-up of the Soviet Union the term emerging markets started being used more widely. It had been coined with a primary investment focus (which still remains at the core of the MSCI list providing one specific and narrow definition of "emerging") but the term grew more common and its boundaries became quite a loose … to the point that the world has been often described in binary terms: advanced and emerging countries. 

This view of the world carried with it a logic of “convergence” and the notion often used of a “two-speed world” made it seem as if the global economy had gravitated from being dominated by advanced economies to emerging and developing ones.

Advanced economies have gone from accounting for 84% of the global economy in 1992 to 60% in 2018

In fact, there has been quite a lot of change and advanced economies have gone from accounting for 84% of the global economy (based on current $ GDP at market exchanges rates) in 1992 to 60% in 2018. A major shift for sure but it still leaves advanced countries with a significantly larger share of the world economy than emerging countries.

That fact, however, is not as impressive as the “scissors” graph that is often reproduced to show how advanced economies went from representing 58% of the global economy in 1992 to only 41% in 2018 (as shown in the chart by the dotted lines). But the crossover relies on a very misleading calculation: using purchasing power parity (PPP) rates instead of market exchange rates. 

The impact of PPP adjustments is very large in low and middle-income countries. For instance, in 2017 the size of the Chinese economy in PPP was 1.9 times the one based on market exchange rates and the size of the Indian economy 3.6 times. In contrast, for high-income countries the two indicators produce similar values (the US is the 1.0 reference point and the multiplier in most large high-income countries is between 0.9 and 1.1).

PPP calculations are very useful to provide meaningful comparisons of per capita income levels across countries but have serious limitations as a basis for comparisons of national economic might or as a basis for assessing relative market sizes. Better to rely on current $ GDP at market exchange rates to look at the geographical composition of World GDP!

This binary view of the world got so much traction that many corporations created emerging markets organisations and strategies. But as many have since realised, there was a serious problem with that approach and it was getting worse: the emerging and developing countries category was a very mixed bag and much of the apparent convergence was due to just one country: China. 

This becomes obvious by separating the role of China from the rest of emerging and developing (EM&D) countries. The data, especially over the last decade, do not provide much support for the notion of convergence for the overall group. It also shows how quickly the BRICS label became obsolete (in 1992 China was half of the size of the combined economies of the other four countries – BRIS – but it is now twice as large).

Contrary to common perceptions neither the BRIS nor the rest of EM&Ds have gained much share of the world economy over the last decade, and gained only modestly since 1992.

As shown above, the G7, BRICS and emerging countries are no longer useful categories to understand evolving market opportunities and to use as a basis for structuring and deploying global corporate strategies. There is no simple alternative but in the next section will explore ways in which the evolving composition of the world economy can be categorised … more along the lines of a multi-coloured mosaic than a binary color spectrum.

A mosaic mindset

The binary view of the world is convenient, memorable and had always had limitations but its usefulness has eroded further as the range of country situations had increased in recent decades. It is also lopsided: the IMF’s World Economic Outlook database tracks 194 countries—of them 39 are labeled as Advanced and 155 as Emerging and Developing.

There is no simple alternative, and neither is the composition of the global economy something that can be better described with a new income threshold for an update binary view. Instead, we propose to use a dual logic to categorise countries in a way that reflects the complexities of the global economic landscape and helps identify typologies of countries with commonality around their characteristics as potential markets or investment targets. 

The dual logic consists of economic opportunity and consumer purchasing power. As proxies for these two perspectives we propose, in the first instance, to consider per capita income in PPP terms (a rough measure of consumers’ purchasing power); and the size of projected increases in GDP (a broad, forward-looking measure of market size).

Income levels (indicative of purchasing power) as the first criterion for country typologies makes sense from a global business perspective because it is indicative of the average consumer purchasing power in the specific country context and of market maturity.

We propose using thresholds that having relevant to shifts in consumer behaviour (from basic goods to low-end durables, to more sophisticated durables, to luxury goods). This sorts the world into four groups of similar size (ranging from 42 to 53 countries in each). Each of the groups has widely different average per capita income levels (even though the use of PPP shrinks per capita income differences across countries).

The table above provides the countries at the boundaries of the categories, as well as examples of other countries in each category.

Economic opportunity is the second criterion and we estimate it through projected GDP growth (in nominal USD terms at 2018 constant terms) provides a measure that combines GDP size and growth dynamics—hence relevant as a forward-looking indicator of broad market size. The aggregate GDP in the global economy was $85 trillion in 2018; by 2025 our estimate is that it will have increased to $104 trillion. What different countries contribute to this $19 trillion increase is our measure of economic opportunity or expanding market size.

Before looking at what the combination of our two criteria produce it is worth looking at what each of the four income categories means in terms of shares of the world population, GDP and incremental GDP. 

Not surprisingly, the highest income A category currently accounts for the bulk (62%) of the current global GDP although it is only home to 15% of the population.

Conversely, the similar share of the world’s population in the lowest income D category accounts for barely 1% of global GDP. Looking ahead at GDP growth, it is category B countries that account for the largest share (45%)—much larger than their 28% share of current GDP.

There are clearly interesting countries from a market and investment perspective in that category—including but not limited to the original BRIC countries (South Africa is in the lower category). But what their growth dynamics are is also a strategic factor to consider, and they differ considerably.

Considering individual country contributions to the GDP increment, we sort them into four categories on the basis of three size thresholds: over $150 billion; $50 billion and $10 billion. We find that the majority of countries falls in the low contribution category but each of the other categories have significant numbers of countries as well.

Combining the two criteria (income level and contribution to GDP increment) each with four categories produces the mosaic that we propose as a way of exploring the dynamic landscape of the global economy.

The resulting 16 tiles show the range of situations that need to be kept in mind when looking at market and/or investment opportunities. The table below shows the number of countries in each tile, as well as either the whole list of countries (where numbers are small) or some salient examples of countries in the tile.

The A4 (low income, low GDP contribution) tile has the largest number of countries, but still accounts for just over one-fifth of the countries. One of the tiles (A3) is empty; another one (A4—lowest income level and very high contribution) only has Bangladesh in it.

Tile B1 includes three of the four original BRIC as well as a reminder that Mexico and Turkey probably always belonged in that group and India’s lower income level places it in a different situation. And the B2 tile includes a number of potentially interesting countries that are often out of the spotlight. 

It is tempting to compress the mosaic into fewer categories, easier as references while still retaining its dual logic. One simple way of doing that would be to combine the 16 tiles into four quadrants; this kind of blunt approach might lend itself to reasonably memorable labelling but is unlikely to serve a useful purpose as basis for global strategies or reviews.

Instead, using the 16 tiles as a departing point for different approaches to aggregation will be a more effective and nuanced way to fit the needs of the organisation or analyst embarking on a strategic review.

The tiles including countries most relevant as focus for corporate global strategies will vary depending on the nature of the business—whether scale is important or purchasing power are of greater relative importance, or both are required for success.

For different types of business (ranging from low-price consumer goods to high-prices durables or from industrial goods to luxuries) a different combination of tiles into opportunity targets will be appropriate differently.

Customised analyses will need to take into account at least an additional layer addressing risks or vulnerabilities, which will depend on the nature of the activity under consideration: for instance, consumer marketing will be less sensitive to stability or governance risks than unmovable physical investments will. Incorporating such an extra sorting layer would produce a risk-adjusted view of economic opportunity, adding a valuable, practical third logic to the analysis.

Corporate perspective and the intangible economy

This final section contrasts the picture emerging from the conventional measures of national economic size used in earlier sections with a perspective derived from corporate market valuations. Looking through the conventional GDP lens at what is now being referred to as the G4 (China, Japan, US and the EU), the picture consist of: China’s steady rise starting in the mid-1990s—just as Japan’s rise was unravelling; and the US and EU unsteady relative decline (more pronounced now in the latter).

The corporate landscape had for several decades tended to mirror the economic trends (not the only factor, of course as movements in, for instance, commodity prices and interest rates also play a role). Rankings of market capitalisation for listed companies has many limitations as an indicator but still provide useful high-level glimpses at a changing landscape.

The top ten market capitalisation list consisted of US (mostly) and EU companies in 1980, with five of them in the oil sector. In 1990 it was dominated by Japanese companies, especially banks; in 2000 it was again US companies – covering a range of sectors – with just two Japanese companies left; and in 2010 – as the Chinese economy’s size overcame Japan’s – three of the top ten were Chinese companies, while the US still significant with four companies.

But the latest (the chart shows end-September 2019 data) breaks with that dynamic. China’s economy has continued to grow – going from 9% of the world GDP in 2010 to 16% currently – but there are only two Chinese companies in the top ten and they are new players, both in the digital arena. The top of the list is dominated by US corporations playing in that same arena. 

The latest changes to the top ten table tell us something that goes beyond describing how much such a corporate league table can change in a decade—as was the case in the period between 1980 and 2010, roughly in line with change in relative sizes of GDP across major countries.

The most recent top ten list seems to be flagging a major turning point in the global economy

The most recent top ten list seems to be flagging a major turning point in the global economy, one in which the rise of the intangible economy, and in particular the role of digital platforms, is changing the corporate landscape. It is also having an impact on the relative economic strength of countries around the world in a way that GDP statistics are not able to fully capture.

The intangible economy is not new (brand value, for instance, has long been recognised by markets, though not measured in national accounts) but in recent years – keep in mind that the iPhone is only 12 years old – investments generating intangible value (ranging from software to design as well as to ecosystems and the shift from products to experience) have grown and in some cases found spectacular success.

Much remains to be explored around the notion of the intangible economy but there is clear evidence that it is already very significant. For instance, the work of J. Haskel and S. Westlake (they estimate a measure of adjusted GDP that includes intangibles) indicates that the intangible share of GDP in advanced countries has already crossed the 50% threshold.

The question is whether current market valuations of Microsoft, Apple, Amazon and Alphabet (as well as Alibaba and Tencent) are signs of a bubble or indicative of the new dynamics of value generation, and of the ability of a small number of “corporate empires“ to capture it.

If it is the latter it will have many implications for global markets and power structures but also means that conventional GDP measures are giving us a greatly underestimated view of the role of the US economy in the global economic landscape.