Preparing for the economic challenges ahead

From the June 2016 issue.

As structural challenges across the globe are mounting, the world economy could be set for a bumpy ride over the coming decade. McKinsey has developed four future scenarios to help businesses prepare.

With the world economy becoming increasingly complex and interwoven, those trying to understand it are faced with the classic ‘needle in a haystack’ scenario – amid an endless stockpile of data, they have to find a clue as to where global business is headed.

The latest attempt of predicting what may or may not be over the horizon has seen McKinsey’s Luis Enriquez and Sven Smith team up with Jonathan Ablett, an expert at the North American Knowledge Centre in Waltham, Massachusetts, to create what they call an “integrated framework” for understanding how macroeconomic trends interact with the processes that drive global growth.

The plan, according to Enriquez, was to detect some sort of long-term cause and effect pattern that may help us navigate an increasingly volatile global business environment and understand which role commercial road transport will play in it. To do so, they accessed more than a dozen major international databases from such institutions as the United Nations, the World Bank, the International Monetary Fund and the Bank for International Settlements, and created a range of long-term scenarios that look beyond the immediate future, which they argue has been given “oversized importance” as of late.

“We believe that three sets of forces will shape the global economy over the coming decade,” they say. “The first two are stimulus policies and shifting energy markets. These are near-term forces, whose effects are felt on a daily basis. The next two forces, urbanisation and aging, are powerful, inexorable trends aggravating on-going structural challenges. Finally, two forces are of uncertain and variable magnitude: technological innovation and global connectivity. All of these trends could intermittently disrupt and transform sectors.”

Touching on the first set, Enriquez et al. argue that the persistent problem of weak aggregate demand relative to overall economic capacity is one of the most pressing issues we are facing today. Referring to the International Monetary Fund, they estimate that production in the ten largest advanced economies was two per cent “below potential” in 2014. While that gap was smaller than it had been in 2009 (3.3 per cent), for example, it was still significantly worse than the surplus of 0.8 per cent that prevailed in the early 2000s.

“All major economies except China experienced significantly weaker demand in the aftermath of the Global Financial Crisis (GFC). Many governments and central banks responded with fiscal and monetary stimulus programs that fostered the low real-interest-rate environments which have endured for over five years,” they say – adding that most advanced economies have increased rather than reduced their overall debt levels since the GFC.

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