Megatrends Impacting the Global Economy
Part 2 of this series based on the The Global Value of the Intelligent Economy report looks at four trends that are likely to have major implications on the global economy:
- the structural decline in labour productivity
- the rising risks of climate change
- the need to redefine business valuations due to digitalization
- a shift in consumer and worker expectations
Read part 1 here.
1. Declining labour productivity
Labour productivity growth has declined since the Global Financial Crisis (2007-2008) following years of economic growth that lifted 1.3 billion people lifted out of poverty between 1990 and 2018.
Government initiatives, such as upskilling programmes, have so far yielded limited results, with productivity in advanced economies decreasing from 1.3% per year from 2002-2007 to 0.8% between 2013-2018, and from 4.9% to 3.5% per year in emerging economies and developing markets. Causative factors include a globally aging global population coupled with lower fertility rates. The World Health Organisation (WHO) reports that the number of over-60s will rise from 13% today to 17% in 2030 and then to 22% in 2050. Meanwhile, in 2021, more than 60% of the world’s population lived in countries at or below the replacement rate of 2.1 children per woman.
Moreover, one of the major risks of slower economic growth in the developed world is a widening wealth gap that increases inequality in society.
Nevertheless, some of these factors, such as an aging population, may be offset by generative AI’s nascent ability to take up some of the productivity slack. According to McKinsey, generative AI and other digital technologies may boost the global economy by 0.2% to 3.3% from this year to 2040. However, this is dependent on automation rates and assumes that workers affected by the technology at least match their 2022 productivity levels.
And as Andrew Williamson points out in the first post in this series, other factors come into play when it comes to generative AI, “The full impacts will not be felt until a wave of complementary factors are developed, understood, and implemented. The required adjustment costs, organisational changes, and newly required skills can be considered as an increasing stock of intangible capital.”
2. Climate change
A 2021 study shows that global GDP would be slashed by 18% if a temperature rise of 3.2 degrees Celsius occurs if no mitigating action is taken. According to the report, climate change poses the biggest long-term threat to the global economy.
The main risks come from property damage, trade disruption, and worsening productivity. The impact on food security would be immense, given that over 80% of the calories consumed globally come from just 10 crops, including wheat, rice, and maize. Global rice and wheat yields have declined by 0.3% and 0.9% on average each year due to climate change.
According to the Intergovernmental Panel on Climate Change’s (IPCC), global investment that enables the shift to a low-carbon world is six times lower than the level required to combat climate change.
3. Digital disruption is redefining how businesses are valued
While still important, the traditional way of valuing a business by measuring the worth of their physical assets needs to be complemented by valuing other intangibles such as Internet traffic, data created and analysed, total number of subscribers, number of daily active users (DAU), and social impact.
The rate of technological adoption and data creation is rising exponentially, with enterprise IoT spending expected to continue growing at a rate of over 20%, which will be worth an estimated US$520 billion by 2027. A 2022 global survey by IBM has shown that 35% of companies today report using some form of AI in their business, with an additional 42% reporting that they are currently in the midst of exploring the future use of AI. And with 2023 marking generative AI’s breakout year, 60% of firms that report having adopted AI are using generative AI for at least one function.
Technology is also changing the way people, governments, and businesses interact. Digital capabilities proved their worth throughout the COVID-19 pandemic, which served as a catalyst for digital adoption in both the private and public sectors. Digital transformation is necessary for companies to keep up with emerging customer demands, and companies that fail to digitalise are at risk of falling behind.
The transition into this new form of intangible digital capital will likely come with its own set of challenges, including the need to apply monetary values to measurement areas to better understand overall value.
4. Shifting consumer and worker expectations
Savvy consumers expect more: Technology – notably the smartphone and social media – has redefined what consumers consider “fast” by enabling live updates, breaking news, and instant messages. To match consumer needs, businesses have to adapt to this 24/7, always-on culture. Online product reviews and the ease of finding products will force companies to adapt to ensure their products remain competitive in an increasingly competitive landscape.
The rise of remote workers: Tech- and COVID 19-enabled remote working and flexible hours resulted in higher levels of happiness and productivity, despite more hours worked. The pandemic also spurred the “Great Resignation”, with monthly voluntary quits rising to its highest level this century, which has forced firms to address the issue of job dissatisfaction in the labour market, including the use of advanced technologies.
That said, recent findings from a Gallup survey show that remote workers in the US feel less connected to their company’s mission than they did pre-pandemic, with just 28% feeling connected to their company’s mission compared with 33% of workers who go to the office daily.
In part 3 of this series, we look at how transitioning into the intelligent economy can help us overcome these challenges.
In the meantime, download the The Global Value of the Intelligent Economy report.
Disclaimer: Any views and/or opinions expressed in this post by individual authors or contributors are their personal views and/or opinions and do not necessarily reflect the views and/or opinions of Huawei Technologies.