The world’s major economies have increasingly diverged over the past few years. Global integration has in the past driven convergence. Now the prospects for further integration have become less certain. The global financial crisis has been followed by years of weak growth and growing concerns over inequality. The path to renewed and stronger growth remains elusive, while world trade growth is slowing.
A recent WTO report on G20 trade measures showed that between mid-October 2015 and mid-May 2016, G20 economies applied 145 new trade restrictive measures, equating to an average of nearly 21 new measures per month. This is the highest monthly average registered since the monitoring exercise began in 2009.
Geopolitical, political, and macroeconomic instability continues to influence the current global economic environment. Indeed, US president Donald Trump’s stance on protectionism has further raised concerns about global trade deals. These are complex issues; structural change caused by globalisation and technological change has deeply affected some sectors and industries — while benefiting society as a whole. Globalisation has been the principal driver in raising incomes and improving the prospects for much of the world’s poor. Moreover, in combination with technological innovation, it has led to reduced price inflation — which in turn has helped to lower global interest rates.
The benefits are clear, however there is a growing population — particularly in the developed countries — that are feeling increasingly marginalised as a result of globalisation. Concerns over wages, jobs, and future prospects are real and pressing issues for those who are most directly affected by globalisation. Economic integration, while beneficial to global productivity and progress, may itself not be good enough; its benefits need to flow more broadly.
Is globalisation at a turning point?
While the traditional measures for improving international trade and financial flows are having less of an impact, we remain optimistic on the future for global integration of markets, particularly in the following areas:
1. Disruption
After a 20-year period of growing around twice as fast as the global economy, global flows of goods and services peaked at roughly 53% of global GDP. A study by McKinsey shows that since then, flows have fallen and are now just 39% of global GDP. Meanwhile however, cross-border digital traffic has grown rapidly in the past decade, and is projected to increase further. International data flows are now thought to generate more economic value than traditional flows of traded goods. Also, because many aspects of the digital economy cannot be easily dictated by trade agreements, the impact of those agreements is likely to be less severe for technology companies than for those in more traditional sectors of the economy Digital information flows bring opportunities for multinationals to disseminate new ideas more rapidly and scale up to reach new markets faster than in the past.
2. Demographics
Globally, the number of those aged 65 and over is growing at around twice the rate of the overall population. By 2040, the global population of people aged 65 and older will double to almost 1.3 billion. The implications of a demographic shift of such magnitude are far reaching.
3. Rising middle class
During the next 10 years, developing countries are expected to add about a billion people to the middle class and above. These emerging economies will account for nearly half of total global consumption, which will have a significant impact on the global economy. As China, India and other emerging market countries (net beneficiaries of globalisation) grow in terms of GDP per capita and, importantly, per-capita spending, their consumer behaviour will play an increasingly important role in global consumption.
4. Industry champions
Multinational companies still account for 80% of trade, 75% of private sector research and development (R&D) and 40% of productivity growth worldwide. In addition, many have supply chains that are deeply entrenched across the globe and not easily uprooted. While we recognise the potential for near-term headwinds in terms of changes to trade deals and tax rules, demand for the best products and services will remain global.
Grounds for optimism
Far from being fazed by the potential changes brought about by globalisation, we remain optimistic for the future. We see plenty of companies that are global and that can do well in this new environment, while new and innovative companies are emerging around the world at an increasing pace.
Richard Carlyle is the Investment Director at Capital Group and will be taking part in the panel discussion, Global equities and emerging markets: buyers and asset managers on what strategies can beat the benchmark, taking place on Tuesday 13th June at FundForum International.
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