Keynote One: What lies ahead – Why the next 30 yrs will be different from the last 30 Richard Dobbs, Director - McKinsey
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Keynote One: What lies ahead – Why the next 30 yrs will be different from the last 30 Richard Dobbs, Director - McKinsey

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We have seen beyond any rational doubt that the global economy is "unbalanced". In fact, "balance" in the sense of a permanently fixed state of affairs has always been an illusion. The axis of......

We have seen beyond any rational doubt that the global economy is "unbalanced". In fact, "balance" in the sense of a permanently fixed state of affairs has always been an illusion. The axis of global trade has performed a "complete 360" – in a world that we see as "new", the so-called "emerging" powers and economies are the same ones that initiated global trade centuries earlier.

The Big Difference today is that we now have "instant globalisation". Processes and trends that used to take a thousand years can now happen in well under a thousand days.

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  • 1. What lies ahead– why the next 30 years will bedifferent from the last 30Richard Dobbs, Director,McKinsey Global Institute McKinsey & Company |
  • 2. Capital has become increasingly cheap since the mid 1980s Long-term interest rates in developed economies, 1975-2009 Yield to redemption on long-term government bonds Percent, GDP-weighted 14 12 10 8 6 4 Nominal values 2 Ex-post real values 0 1975 1980 19851 10-year government bonds where available. 1990 1995 2000 2005 20102 Calculated as nominal yield on 10-year bonds in current year minus average realized inflation over next 10 years. We use OECD estimates of inflation in 2009-19 to estimate real interest rates in 2000-09. SOURCE: International Monetary Fund International Financial Statistics; Organisation for Economic Co-operation and McKinsey & Company | 1 Development; McKinsey Global Institute
  • 3. Average commodity prices have fallen substantiallyMcKinsey Commodity Price Index (years 1999-2001 = 100)260240 World War I220 1970s oil shock200180 World War II160140 -48%120100 Post-war Great 80 Depression Depression 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 20001 Based on arithmetic average of 4 commodity sub-indices of food (coffee, cocoa, tea, rice, wheat, maize, sugar, beef, lamb, bananas and palm oil), agricultural raw materials (cotton, jute, wool, hides, tobacco, rubber and timber), metals (steel, aluminum, tin, copper, silver, lead and zinc), and energy (oil, coal, and gas) with each sub-index weighted by total world export volumes 1999-2001 at indexed prices over the same time period in real.SOURCE: Grilli and Yang, 1988; Pfaffenzeller et al., 2007; World Bank; International Monetary Fund; OECD statistics; McKinsey & Company | 2 FAOStat; UN Food and Agriculture Organization; UN Comtrade; McKinsey Global Institute analysis
  • 4. Now we are moving into a new economic era“The great moderation”(1980-2000) “Demographic dividend” driving economic growth Progressively cheaper capital driving asset price growth (and leverage) Cheaper resources Cheaper labor Governments privatizing, cutting taxes and promising more Each generation “richer than their parents” McKinsey & Company | 3
  • 5. Now we are moving into a new economic era“The great moderation”(1980-2000) Trend break “Demographic dividend” driving economic growth Progressively cheaper capital driving asset price growth (and leverage) Debt crisis Cheaper resources Urbanization Cheaper labor Aging Governments privatizing, cutting taxes and promising more Disruptive Each generation “richer than their parents” technologies and interconnection McKinsey & Company | 4
  • 6. The last decade saw a credit boom of immense proportionsTotal debt, 1990-Q2 2011, Percentage of GDP Change 2000-08550 Percentage points500450 Japan 37 United Kingdom 177400 Spain 145350 France 89300 Italy 68250 South Korea 91200 United States 75150 Germany 7 Australia 77100 Canada 39 0 1990 92 94 96 98 2000 02 04 06 08 Q2 20111 Includes all loans and fixed-income securities of households, corporations, financial institutions, and government.2 Defined as an increase of 25 percentage points or more.3 Or latest available.SOURCE: Haver Analytics; national central banks; McKinsey Global Institute McKinsey & Company | 5
  • 7. Europe 21% China 25% India 32% Other* 11% Rest of 11% Asia 1 AD *Including North AmericaNote: artistic impression; not to be used for navigation McKinsey & Company | 6Source: MGI analysis using data from Angus Maddison, Nasa and MGI Cityscope
  • 8. The action was in Asia 1 ADNote: artistic impression; not to be used for navigation McKinsey & Company | 7Source: MGI analysis using data from Angus Maddison, Nasa and MGI Cityscope
  • 9. Europe 25% China 25% India 24% Other* 11% Rest of 15% Asia 1500 *Including North AmericaNote: artistic impression; not to be used for navigation McKinsey & Company | 8Source: MGI analysis using data from Angus Maddison, Nasa and MGI Cityscope
  • 10. McKinsey & Company | 9
  • 11. 2x richer McKinsey & Company | 10
  • 12. European 17% cities China and 11%North IndiaAmerican 20% (total)cities OECD Asia-Pacific 9% cities Other 13% cities 2000 Non-urban GDP 30%Note: artistic impression; not to be used for navigation McKinsey & Company | 11Source: MGI analysis using data from Angus Maddison, Nasa and MGI Cityscope
  • 13. McKinsey & Company | 12
  • 14. 3x richer McKinsey & Company | 13
  • 15. Typically, an increase in urbanization is paralleled by an increase in GDPper capitaPer capita GDP and urbanization time series, 1891-20051 Per capita GDP 1990 PPP USD (log scale)2 Germany 2005 United States 30,000 Japan 2005 2005 Italy United Kingdom 2005 2005 South Korea 10,000 2005 China 2005 Brazil India 2005 2005 1950 3,000 1950 1860 1820 1,000 1891 1930 1950 1920 1950 300 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 Urban population Percent1 Definition of urbanization varies by country; pre-1950 figures for the United Kingdom are estimated.2 Historical per capita GDP series expressed in 1990 Geary-Khamis dollars, which reflect purchasing power parity.SOURCE: Population Division of the United Nations, Angus Maddison via Timetrics, Global Insight, Census reports of McKinsey & Company | 14 England and Wales, Honda in Steckel & Flouds, 1997, Barioch, 1975
  • 16. European 13% cities Chinese and Indian 25%North citiesAmerican 14%cities OECD Asia-Pacific 6% cities Other 17% cities 2025 Other GDP 25%Note: artistic impression; not to be used for navigation McKinsey & Company | 15Source: MGI analysis using data from Angus Maddison, Nasa and MGI Cityscope
  • 17. The economic transformation is happening at a scale and rate faster thanever in history PopulationYears to double GDP per capita Total years MillionsKorea 10 37China 14 1,020India 17 820Japan 33 47Sweden 37 4US 53 10Germany 64 28Britain 155 9 1700 1750 1800 1850 1900 1950 20001 Time to increase GDP per capita (in PPP terms) from 1,300 to 2,600 USD2 Population at start of growth periodSOURCE: MGI analysis using data from Angus Madision, University of Groningen McKinsey & Company | 16
  • 18. Effect of changing age mixContribution of share of working-age population growth to yearly GDP per capita growth, percentage points 1.1 0.3 0.1 Korea -0.4 0.2 0.1 -1.1 U.K. 0 -0.3 -0.3 0.5 Germany -0.1 -0.3 -0.2 0.3 -0.9 France -0.1 -0.1 -0.5 -0.4 0.6 0.3 Spain -0.1 -0.3 -0.4 0.6 Italy -0.2 -0.3 -0.3 -0.4 0.4 EU-15 0 -0.1 -0.3 -0.5 0 0.1 U.S. -0.1 -0.3 -0.4 1980-1990 1990-2000 2000-2010 2010-2020 2020-2030SOURCE: United Nations Population Division McKinsey & Company |
  • 19. Commodities now show significant correlation with oil pricesCorrelation with oil prices 1980 to 1999 2000 to 2004 2005 to 2011 Maize -0.01 0.74 0.96 Wheat -0.07 0.59 0.94 Rice 0.32 0.96 0.61 Beef -0.11 0.75 0.74 Steel -0.01 0.99 0.99 Timber -0.52 0.67 0.91 McKinsey & Company |
  • 20. The last 30 years saw rising global prosperity driven by strongfundamentals, but the next decade or more looks very different“The great moderation” Trend break “The great uncertainty”(1980-2000) (2010-2030) “Demographic dividend”  Emerging markets will driving economic growth drive global growth and Debt crisis in OECD increases in wealth Progressively cheaper Urbanization  More expensive capital capital driving asset price  More expensive and growth (and leverage) Aging volatile resource prices Cheaper resources Disruptive  Growing labor market and labor technologies and mismatches and inequality Governments privatizing, interconnection  More government cutting taxes and intervention, fiscal promising more austerity Each generation “richer than their parents”1 Covered as part of the digital chapter McKinsey & Company | 19
  • 21. GLOBAL REBALANCINGGrowth in emerging markets is based on the 3 billion people 3 billion people entering the 2009that will enter the middle class over the next decade 2020Millions 2030 Global Middle Class Europe North America 664 703 680 333 338 342 Asia Pacific Middle East and Africa Central and 137 222 341 South America 525 1,740 3,228 181 251 3131 Global middle class defined as daily expenditures between $10 and $100 per person in purchasing parity terms.SOURCE: OECD Development Center McKinsey & Company | 20
  • 22. Developed economiesNearly half of global growth by 2025 will be in Emerging market“middleweight” cities in emerging markets megacities Emerging market middleweight citiesContribution to global GDP growth Emerging market smallPercent cities and rural areas GDP, 2010 GDP growth, 2010-25 100% = =USD 62.7 trillion USD RER 100% = USD 50.2 trillion USD RER 12 13 26 Small 12 12 13 38 19 Midsized 4 68 Small 30 Large 3 64 49 11 5 9 10 Large Midsized1 Megacities are defined as metropolitan areas with ten million or more inhabitants. Middleweights are cities with populations of between 150,000 and ten million inhabitants.2 Includes all 2,600+ cities from MGI Cityscope database.3 Real exchange rate (RER) for 2010 is the market exchange rate. RER for 2025 was predicted from differences in the per capita GDP growth rates of countries relative to the US.Note: Numbers may not sum due to roundingSOURCE: McKinsey Global Institute Cityscope 2.0 McKinsey & Company | 21
  • 23. By 2020, emerging markets’ share of financial assets is projected to doubleTotal financial assets, 2010-2020FPercent; USD trillion Other emerging 113.1 198.1 391.5 3 4 11 China 5 19 10 Other developed 19 9 17 Japan 14 9 Western Europe 34 9 27 22 United States 35 29 24 2000 2010 2020FEmerging markets’ 8 41 141financial assetsUSD trillion1 Measured in 2010 exchange rates.2 Rapid growth in emerging markets but low growth through 2015 in mature economies.3 Emerging markets’ currencies appreciate vis-à-vis the US dollar.SOURCE: McKinsey Global Institute McKinsey & Company | 22
  • 24. In 2008, China overtook the United States as the world’s largest saverGross national savingsUSD billion, nominal values China and United States 2010 3,500 3,207 China 3,207 China 3,000 US 1,755 Japan 1,287 2,500 Germany 757 2,000 1,755 US India 566 1,500 France 449 1,000 Russia 390 569 Brazil 361 500 66 Italy 349 0 Korea 333 1980 85 90 95 2000 05 10SOURCE: CEIC; Haver Analytics; McKinsey Global Growth Model; International Monetary Fund; World Development McKinsey & Company | 23 Indicators of the World Bank; United Nations System of National Accounts; MGI
  • 25. In developed countries, aging populations are saving less Japan net household saving rate Elderly dependency ratio Percentage of disposable personal income Percentage of total population20 2018 1816 1614 1412 1210 10 8 8 6 6 4 4 2 2 0 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010SOURCE: United Nations (Population Division); Bank of Japan; McKinsey Global Institute McKinsey & Company | 24
  • 26. Lower investor demand for equities could fall short Incremental demand for equitiesof corporate needs by US$12.3 trillion Increase in corporate equity needsIncremental demand for equities by domestic investors vs.increase in corporate equity needs, 2010-20FUSD trillion; 2010 exchange rates 37.4 9.8 United States -12.3 9.2 25.1 2.8 Western Europe 5.9 4.3 Other developed 3.9 4.7 China 7.9 Incremental Increase in 3.5 demand for corporate Other emerging 10.5 equities equity needs1 France, Germany, Italy, Spain, and the United Kingdom.2 Australia, Canada, Japan, and South Korea.3 Brazil, India, Indonesia, Mexico, Russia, South Africa, and Turkey.SOURCE: McKinsey Global Institute McKinsey & Company | 25
  • 27. Resource consumption in emerging markets islikely to expand significantly with increased prosperityEnergy consumption per capita, 1970-2008Million BTU per person250 United States Germany United Kingdom South Korea200 Thailand Australia Singapore Japan China France150 India Indonesia Historical range for energy consumption100 evolution 50 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 India 2030 China 2030 GDP per capita projected projected Real USD 1,000, US PPP per personSOURCE: IEA, Global Insight; McKinsey analysis McKinsey & Company | 26
  • 28. Emerging markets could account for over Developing90 percent of growth in energy demand by 2030 Developed Compound annual Primary energy demand growth rate, 2010-30 QBTU Percent 680 26 Global 1.4 591 22 499 214 OECD 0.2 20 205 204 Other 206 1.6 non-OECD 174 150 58 India 4.3 39 25 150 176 China 2.9 100 2010 2020 20301 Includes cross-border energy use, e.g., sea, air travel.SOURCE: McKinsey analysis (Cost Curve v3.0) McKinsey & Company | 27
  • 29. Commodity prices have increased sharply since 2000, erasing all thedeclines of the 20th century …McKinsey Commodity Price Index (years 1999-2001 = 100)260240 World War I220 1970s oil shock200180 World War II160140120100 Post-war Great 80 Depression Depression 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 20111 Based on arithmetic average of 4 commodity sub-indices of food, non-food agricultural items, metals, and energy.2 2011 prices based on average of first eight months of 2011.SOURCE: Grilli and Yang, 1988; Pfaffenzeller et al., 2007; World Bank; International Monetary Fund; OECD statistics; McKinsey & Company | 28 FAOStat; UN Food and Agriculture Organization; UN Comtrade; McKinsey Global Institute analysis
  • 30. These resource trends pose several risks to global growth and welfare The IMF estimates that a 10 percent increase in the price of crude reduces global GDP by 0.2-0.3 percent in one year The World Bank estimates that recent food price increases drove 44 million people into poverty At least eight countries commit five percent or more of their GDP to energy subsidies. In 2005, government subsidies were estimated to account for 14 percent of India’s GDP Just four countries – Iran, Iraq, Saudi Arabia, and Venezuela – hold almost 50 percent of known oil reserves A recent study by the Economics of Climate Adaptation Working Group suggests that some regions are at risk of losing up to 12 percent of their annual GDP by 2030 as a result of existing climate patterns McKinsey & Company | 29
  • 31. Labor force growth will likely slow worldwide and 1990 Compound annual growth rate (percent)become flat across advanced economies by 2030 2010 1990–2010 2030 2010–2030Labor forceMillion workers 21.6% 24.8% 1.4% 1.6% 3,464 2,849 2,940 2,143 2,355 1,726 6.0% 0.9% 417 494 524 Global aggregate Developing economies Advanced economies1 Includes 45 countries from the Young Middle-Income, China, India, Young Developing, and Russia & CEE clusters.2 Includes 25 countries from the Young Advanced, Aging Advanced and Southern Europe clusters.SOURCE: United Nations Population Division (2010 revision); ILO; local statistics for China and India; McKinsey Global McKinsey & Company | 30 Institute analyses
  • 32. Labor’s share of income across advanced economies has fallen steadilyfor three decadesLabor share of income in advanced economiesPercentage of total6564 -3.563 pp62 -7.161 pp60 -3.5 pp5958 0 1970 1975 1980 1985 1990 1995 2000 2005 20101 Employee compensation as a percent of gross national income using real 2000 US dollars, excludes government transfers and capital receipts.2 Includes the United States, the United Kingdom, France and Australia from the Young Advanced cluster; the Netherlands, Japan, Sweden and Germany from the Aging Advanced cluster; and Portugal, Italy, Greece and Spain from the Southern Europe cluster.SOURCE: OECD; World Bank Development Indicators; EU KLEMS; Havers Analytics; McKinsey GlobalMcKinsey &analyses | 31 Institute Company
  • 33. Wages for US workers with tertiary education have grownmore than twice as fast as for others, creating a widening gapGrowth in real weekly wages for full-time workers, Ratio of weekly wages of college1963-2008 graduates to high school dropoutsCompound annual growth rate, percent Multiple 2.8 1.1 +63% 1.7 0.5 0.4 0 1963 2008 College Some High School Less than graduate college graduate high school1 Includes workers who have completed college or graduate school.SOURCE: CPS 2008; Daron Acemoglu and David Autor, Skills, Tasks and Technologies: Implications for Employment and McKinsey & Company | 32 Earnings, 2010; McKinsey Global Institute analyses
  • 34. Across advanced economies, unemployment rates of low-skill workersare 2-3x the rates of high-skill workers Less than upper secondary SecondaryUnemployment rate, 25-64 years, by educational attainment TertiaryPercentage of labor force United Kingdom France Denmark Germany Sweden Spain 15 16 15 131999 10 11 9 9 7 6 7 7 4 4 5 4 3 3 26 19 13 142011 11 12 10 9 6 7 6 6 4 5 5 5 4 2SOURCE: Eurostat; OECD Education at a Glance 2011; McKinsey Global Institute analyses McKinsey & Company | 33
  • 35. The last 30 years saw rising global prosperity driven by strongfundamentals, but the next decade or more looks very different“The great moderation” Trend break “The great uncertainty”(1980-2000) (2010-2030) “Demographic dividend”  Emerging markets will driving economic growth drive global growth and Debt crisis in OECD increases in wealth Progressively cheaper Urbanization  More expensive capital capital driving asset price  More expensive and growth (and leverage) Aging volatile resource prices Cheaper resources Disruptive  Growing labor market and labor technologies and mismatches and inequality Governments privatizing, interconnection  More government cutting taxes and intervention, fiscal promising more austerity Each generation “richer than their parents”1 Covered as part of the digital chapter McKinsey & Company | 34
  • 36. Questions to consider … Footprint Is your global footprint aligned to growth? Are you allocating enough resources to high growth cities and areas? Do you understand customer needs in these growth areas? Capital and resources Are you prepared for larger and more rapid changes in interest rates, resource inputs, and higher potential for a liquidity crunch? Are you ready for increased correlation? Business portfolio How does this need to be realigned? Are parts of it exposed to changes in resources prices or shift in the cost of capital? Are you ready for lower OECD growth? Talent Are you ready to source talent from new sources as the OECD demographic dividend comes to an end? Is there a way of upskilling lower skill talent? Competitive landscape How will changes in interest rates, resource inputs and talent availability change the competitive landscape? Can you compete with Chinese peers with their access to cheaper capital and talent? How can you cope with volatility? McKinsey & Company | 35
  • 37. Thank youMaterials available:www.mckinsey.com/mgiwww.mckinsey.com/mgi McKinsey & Company | 36