The next super cycle

Interesting piece from Standard Chartered:

The third super-cycle started – in our view – in 2000. The period between the second and third super-cycles, from the early 1970s to 2000, was characterised by ongoing economic challenges in the West, a slowdown in Japan, the collapse of the Soviet Union, debt and currency crises in Latin America, and the relatively small size of China and India, both of which were in the early stages of opening up. There was no dynamic driver for the world economy. In 2000 the world economy was $32 trillion in size. Now, following the global recession and financial crisis, the world economy is almost twice the size of a decade ago. There was a significant contraction as a result of the crisis and global recession, but now the world is back to its pre-recession peak. Next year, based on conservative growth assumptions, this could rise to $64.7 trillion. Global trade has also recovered to pre-recession levels.
By 2030 – the time period for this analysis – we believe that the world economy, on the projections laid out here, would rise to $308 trillion, which would equate to $129 trillion in today\’s prices and dollars, and would be $143 trillion, keeping prices constant but allowing for some emerging-market currency appreciation (see chart above).
Now we could of course dismiss this a piece of bankerly tosh. But it might be unwise to do so.
For we do have an entirely non bankerly estimate which makes much the same point. Here.
The global economy expands at an average annual rate of about 3% to 2100, reaching around US$550 trillion (all dollar amounts herein are expressed in 1990 dollars, unless stated otherwise). This is approximately the same as average global growth since 1850, although the conditions that lead to this global growth in productivity and per capita incomes in the scenario are unparalleled in history. Global average income per capita reaches about US$21,000 by 2050.
3% growth on that $64.7 trillion, with compounding, is $116.8 trillion by 2030. We\’re in the same sort of ballpark then. And that second estimate? One of the economic projections upon which the entire edifice of climate change is based. Yes, this is one of the numbers which gets plugged into the IPCC models.
Further, it\’s the estimate which comes closest to the best estimation method we have of the future. Tomorrow is going to be much like today, next week much like last week, next year much like last.
Sure, there will be minor variations, 1% this way or that: days do get longer going into the spring, shorter in the autumn, but our best bet is that daylight tomorrow will be much like today. If it\’s -20 oC here, today, then our best estimate of temperatures tomorrow is going to be -30- -10 oC: we\’re not about to say that the system will jump to plus 20 oC. If global economic growth has been 3% in real terms for a century and a half our best estimate of future global economic growth is going to be about 3%.
Unless we want to call in some extraordinary evidence to show that it won\’t be of course. Or follow some blindingly stupid policy (and there are so many to choose from!) which kills economic growth stone dead. But even then, the stupidities which we perpetrate in the UK won\’t have all that much effect on the global economy.
But reject this as bankerly tosh if you wish: in doing so, you\’ve also got to reject one of the building blocks of the whole climate change thang. And as you know, I don\’t reject the underlying science and assumptions of climate change and thus do not regard as bankerly tosh something which agrees with it.

6 comments on “The next super cycle

  1. The IPCC stuff is ten years old. Striking that 9/11, credit crunch, recession, Iraq ‘n’ Afghanistan all notwithstanding, things still seem much the same…

    Tim adds: Indeed. As I’ve been known to point out, the long term success of an econpomy, it’s long term growth, is driven much more by the microeconomics of incentives and property rights etc than it is by whatever politicians do.

  2. I feel a veritable Kondratieff wave of revulsion against this bankerly tosh.
    SC projection requires growth at a bit over 3% and inflation a bit under 5%. What’s amazing about that? Headline, anyone?
    All that CO2 in the atmosphere will mean fewer people going hungry, so we might beat 3% growth.
    By the way, SC’s figures give a result of $208T not $308, according to their assumptions.

  3. So it seems you don’t agree with Tyler Cowen after all!

    If you agree that most of the growth post was was from prewar improvements not previously exploited as he does, then where is the new growth going to come from?

    What if growth falters because there’s just less to discover?

    (I don’t necessarily buy this, but you were the one quoting Cowen earlier when it suited you)

    Tim adds: Try to distinguish between rich world economic growth and global economic growth. At that point you’ll see that the argument is actually exactly the same.

    1929-1945 the production frontier moved out, but the economy *in the rich countries* didn’t grow very much. They then caught up to that frontier giving us the Post WW II boom.

    Looking around the world today it’s fairly obvious that the majority of the world economy is well behind that production frontier. There are, of course, a lot of reasons why the poorer areas of the world are well behind that possible frontier, but there’s no fundamental reason why they should always remain so. Stopping doing the various idiot things that are done would help for example, as China, India and Indonesia are all showing us.

    That the 5.5 billion who are currently well behind the production frontier reach that frontier, in essence that they all become as rich as we are, seems possible. Indeed, that’s one of the things that the A1 IPCC scenario is based upon. Convergence as it is called.

    Sure, the rich world economic growth might be 1-2%, 3% maybe. But 4 and 6 and 10% growth in the currently poor areas will boost *global* GDP quite nicely thank you. Don’t forget compounding: China’s 10% pa growth has added $7.5 trillion or so to global GDP in the last decade alone. For 10% compounded means an economy doubles every 7 years (I’ve assumed that the Chinese economy now is about the same size as the US now, about $15 trillion. But with 4 or 5 times the population they’ve still got some way to go to get to that production frontier, no?).

  4. “By the way, SC’s figures give a result of $208T not $308, according to their assumptions.”

    Why do you say that? At 8.5% it works

  5. I think you have overlooked the fact that Lord Stern is an economist – of sorts. His understanding of climate science is abysmal – as would be expected of an economist – present company included!

    If the loonHuhne policies are fully implemented, not to mention the “CO2 is pollution” scenarios, then the western economies will probably regress significantly and all your lovely forecasts will not be reached.

    Oh and one of the criticisms of the Stern paper on the economic effects of climate change was that the discount rate he used was quite unrealistic.

    Make no mistake, I believe the climate is changing – much as it has done for the last few thousand million years. Trouble is I would like a bit of warm and it looks like it might be reverting to a cooler level.

    Why can’t we have it like when the Vikings were growing wheat and barley in Greenland?

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