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

McKinsey & Company |

What lies ahead – why the next 30 years will be different from the last 30

Richard Dobbs, Director, McKinsey Global Institute

McKinsey & Company | 1

Long-term interest rates in developed economies, 1975-2009Yield to redemption on long-term government bondsPercent, GDP-weighted

SOURCE: International Monetary Fund International Financial Statistics; Organisation for Economic Co-operation and Development; McKinsey Global Institute

1 10-year government bonds where available. 2 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.

Capital has become increasingly cheap since the mid 1980s

0

2

4

6

8

10

12

14

20102005200019951990198519801975

Ex-post real values

Nominal values


260

240

220

200

180

160

140

120

80

0

-48%

20001990198019701960195019401930192019101900

100

Average commodity prices have fallen substantially

World War I

Post-warDepression

Great Depression

World War II

1970soil shock

McKinsey Commodity Price Index (years 1999-2001 = 100)

1 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; FAOStat; UN Food and Agriculture Organization; UN Comtrade; McKinsey Global Institute analysis


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”


Now we are moving into a new economic era


“Demographic dividend” driving economic growth


Cheaper resources

Cheaper labor



Trend break

Debt crisis

Urbanization

Aging

Disruptive technologies and interconnection


02200098

550

94921990

500

450

400

350

300

250

200

150

100

0Q2 2011

08060496

SOURCE: Haver Analytics; national central banks; McKinsey Global Institute

1 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.

The last decade saw a credit boom of immense proportionsTotal debt, 1990-Q2 2011, Percentage of GDP

Canada

Australia

Germany

United States

South Korea

Italy

France

Spain

United Kingdom

Japan

Change 2000-08Percentage points

75

39

7

37

177

89

145

68

91

77


*Including North America

1 AD

China 25%

Europe 21%

India 32%

Rest ofAsia

11%

Other* 11%

Note: artistic impression; not to be used for navigationSource: MGI analysis using data from Angus Maddison, Nasa and MGI Cityscope


1 AD

The action was in Asia



*Including North America

1500

China 25%

Europe 25%

India 24%

Rest ofAsia

15%

Other* 11%




2x richer


North American cities

20%

Non-urban GDP 30%

Other cities

13%

European cities

17%

OECDAsia-Pacific cities

9%

China and India(total)

11%

2000Note: artistic impression; not to be used for navigationSource: MGI analysis using data from Angus Maddison, Nasa and MGI Cityscope



3x richer


Typically, an increase in urbanization is paralleled by an increase in GDP per capita

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90

Per capita GDP1990 PPP USD (log scale)2

30,000

10,000

3,000

1,000

300

Urban populationPercent

1820

United States2005

1891

Japan2005

1920

China2005

1950

1950

South Korea2005

1930

Brazil2005

1950

1860

United Kingdom2005

1950India2005

Italy2005

Germany2005

SOURCE: Population Division of the United Nations, Angus Maddison via Timetrics, Global Insight, Census reports ofEngland and Wales, Honda in Steckel & Flouds, 1997, Barioch, 1975

1 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.

Per capita GDP and urbanization time series, 1891-20051


2025Note: artistic impression; not to be used for navigationSource: MGI analysis using data from Angus Maddison, Nasa and MGI Cityscope

North American cities

14%

Other cities

17%

European cities

13%

Chinese and Indian cities

25%

OECDAsia-Pacific cities

6%

Other GDP 25%


195019001850180017501700

Britain

Germany

US

Sweden

Japan

India

China

Korea

2000

The economic transformation is happening at a scale and rate faster than ever in history

SOURCE: MGI analysis using data from Angus Madision, University of Groningen

Years to double GDP per capita

1 Time to increase GDP per capita (in PPP terms) from 1,300 to 2,600 USD2 Population at start of growth period

PopulationMillions

37

4

9

10

28

47

1,020

820

Total years

10

37

155

53

64

33

14

17


Effect of changing age mix

SOURCE: United Nations Population Division

-0.5-0.3-0.10

0.4

Contribution of share of working-age population growth to yearly GDP per capita growth, percentage points

Germany

France

Spain

Italy

EU-15

U.K.

-0.4-0.3-0.3-0.2

0.6-0.4-0.3-0.1

0.30.6-0.4-0.5

-0.1-0.1

0.3 -0.9-0.2-0.3-0.1

0.5

-0.3-0.3

0.1

0

0.2

-0.4-0.3

0.10

-0.1

2000-2010 2010-20201980-1990 1990-2000 2020-2030

U.S.

-1.1-0.4

0.10.31.1

Korea


Commodities now show significant correlation with oil prices

Timber -0.52

Steel -0.01

Beef -0.11

Rice 0.32

Wheat -0.07

Maize -0.01

0.59

0.74

0.67

0.99

0.75

0.96

Correlation with oil prices

1980 to 1999 2000 to 2004 2005 to 2011

0.91

0.99

0.74

0.61

0.94

0.96


Debt crisis

Urbanization

Aging


Emerging markets will drive global growth and increases in wealth

More expensive capital

More expensive and volatile resource prices

Growing labor market mismatches and inequality

More government intervention, fiscal austerity

“The great uncertainty”(2010-2030)

The last 30 years saw rising global prosperity driven by strong fundamentals, but the next decade or more looks very different


“Demographic dividend”driving economic growth in OECD


Cheaper resources and labor



1 Covered as part of the digital chapter

Trend break


3 billion people entering the Global Middle Class

SOURCE: OECD Development Center

Growth in emerging markets is based on the 3 billion people that will enter the middle class over the next decadeMillions

2009

2020

2030

333 338 342

North America

181 251 313

Central and South America

664 703 680

Europe

137 222 341

Middle Eastand Africa

525 1,740 3,228

Asia Pacific

1 Global middle class defined as daily expenditures between $10 and $100 per person in purchasing parity terms.

GLOBAL REBALANCING


Nearly half of global growth by 2025 will be in “middleweight” cities in emerging markets

1 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 rounding

Contribution to global GDP growthPercent

GDP growth, 2010-25100% = USD 50.2 trillion USD RER

Emerging market megacities

Emerging market middleweight cities

Emerging market small cities and rural areas

Developed economies

SOURCE: McKinsey Global Institute Cityscope 2.0

12

12

4

3

564

12

19

68Large

Midsized

Small

13

30

109

11

26

13

49

38

LargeMidsized

Small

GDP, 2010100% = =USD 62.7 trillion USD RER


19

14

9

9

9

4

United States

Western Europe

Japan

Other developed

China

Other emerging

2020F

391.5

24

22

17

19

2010

198.1

29

27

10

11

2000

113.1

35

34

5 3

By 2020, emerging markets’ share of financial assets is projected to double

SOURCE: McKinsey Global Institute

Total financial assets, 2010-2020FPercent; USD trillion

Emerging markets’financial 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.

8 41 141


3,207

66

1,755

0

500

1,000

1,500

2,000

2,500

3,000

3,500

US

China

0520009590851980 10

In 2008, China overtook the United States as the world’s largest saver

Japan 1,287

US 1,755

China 3,207

390

Korea 333

Italy 349

Brazil 361

Russia

France 449

India 566

Germany 757

SOURCE: CEIC; Haver Analytics; McKinsey Global Growth Model; International Monetary Fund; World Development Indicators of the World Bank; United Nations System of National Accounts; MGI

Gross national savingsUSD billion, nominal values

China and United States

569

2010


0

2

4

6

8

10

12

14

16

18

20

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

0

2

4

6

8

10

12

14

16

18

20

Elderly dependency ratioPercentage of total population

Japan net household saving ratePercentage of disposable personal income

SOURCE: United Nations (Population Division); Bank of Japan; McKinsey Global Institute

In developed countries, aging populations are saving less


1 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

Incremental demand for equities by domestic investors vs. increase in corporate equity needs, 2010-20FUSD trillion; 2010 exchange rates

37.4

25.1

-12.3

Increase in corporate equity needs

Incremental demand for equities

2.8

4.7

3.5

4.3

9.8

10.5

7.9

3.9

5.9

9.2

Other emerging

China

Other developed

Western Europe

United States

Incremental demandfor equities

Increase in corporateequity needs

Lower investor demand for equities could fall short of corporate needs by US$12.3 trillion


0

50

100

150

200

250

36 383416 4018 2220 3224 26 3028148 4442

GDP per capitaReal USD 1,000, US PPP per person

12

Energy consumption per capita, 1970-2008Million BTU per person

60 42 10

SOURCE: IEA, Global Insight; McKinsey analysis

Historical range for energy consumption evolution

Thailand Australia

JapanSingapore

FranceChina

IndonesiaIndia

United States Germany

South KoreaUnited Kingdom

Resource consumption in emerging markets is likely to expand significantly with increased prosperity

India 2030 projected

China 2030 projected


Emerging markets could account for over 90 percent of growth in energy demand by 2030

204

205

214

China

India

Othernon-OECD

OECD

Global

2030

680

176

58

206

26

2020

591

150

39

174

22

2010

499

100

25

150

20

SOURCE: McKinsey analysis (Cost Curve v3.0)

Compound annual growth rate, 2010-30Percent

2.9

4.3

0.2

1.6

1.4

1 Includes cross-border energy use, e.g., sea, air travel.

Developing

Developed

Primary energy demandQBTU


Commodity prices have increased sharply since 2000, erasing all the declines of the 20th century …

McKinsey Commodity Price Index (years 1999-2001 = 100)

1 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; FAOStat; UN Food and Agriculture Organization; UN Comtrade; McKinsey Global Institute analysis

260

240

220

200

180

160

140

120

100

80

0201120001900 19801970196019501940193019201910 1990

World War I

Post-warDepression

Great Depression

World War II

1970soil shock


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


Labor force growth will likely slow worldwide and become flat across advanced economies by 2030

1 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 Institute analyses

2,1431,726

417

6.0%0.9%

24.8%

1.6%

21.6%

1.4%

Advanced economies

524494

Developing economies

2,940

2,355

Global aggregate

3,464

2,849

1990

2010

20301990–2010

2010–2030

Compound annualgrowth rate (percent)

Labor forceMillion workers


Labor’s share of income across advanced economies has fallen steadily for three decades

1 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 Global Institute analyses

1970 1975 1980 1985 1990 1995 2000 2005 2010

64

65

63

62

61

60

59

0

58

-3.5 pp

-3.5 pp

-7.1pp

Labor share of income in advanced economiesPercentage of total


Wages for US workers with tertiary education have grown more than twice as fast as for others, creating a widening gap

0

0.40.5

1.1

Less than high school

High School graduate

Somecollege

Collegegraduate

SOURCE: CPS 2008; Daron Acemoglu and David Autor, Skills, Tasks and Technologies: Implications for Employment and Earnings, 2010; McKinsey Global Institute analyses

2.8

1.7

+63%

20081963

1 Includes workers who have completed college or graduate school.

Growth in real weekly wages for full-time workers, 1963-2008Compound annual growth rate, percent

Ratio of weekly wages of college graduates to high school dropoutsMultiple


Across advanced economies, unemployment rates of low-skill workers are 2-3x the rates of high-skill workers

SOURCE: Eurostat; OECD Education at a Glance 2011; McKinsey Global Institute analyses

Unemployment rate, 25-64 years, by educational attainmentPercentage of labor force

Less than upper secondary

Secondary

Tertiary

UnitedKingdom

1999

2011

347

Denmark

1113

15

12

19

26

France Germany Sweden Spain

46

10

47

10

45

11

69

15

57

13

347

569

59

16

26

14


Debt crisis

Urbanization

Aging


Emerging markets will drive global growth and increases in wealth

More expensive capital

More expensive and volatile resource prices

Growing labor market mismatches and inequality

More government intervention, fiscal austerity

“The great uncertainty”(2010-2030)

The last 30 years saw rising global prosperity driven by strong fundamentals, but the next decade or more looks very different


“Demographic dividend”driving economic growth in OECD


Cheaper resources and labor



1 Covered as part of the digital chapter

Trend break


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?


Thank you

Materials available: www.mckinsey.com/mgi

www.mckinsey.com/mgi

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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