GLOBAL GROWTH: CAN PRODUCTIVITY SAVE THE DAY …€¦ · GLOBAL GROWTH: CAN PRODUCTIVITY SAVE THE DAY IN AN AGING WORLD? CONFIDENTIAL AND PROPRIETARY Any use of this material without

GLOBAL GROWTH: CAN PRODUCTIVITY SAVE THE DAY IN AN AGING WORLD?

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company is strictly prohibited

ACHIEVING STRONGER GROWTH

BROOKINGS INSTITUTION

APRIL 8, 2015

McKinsey & Company | 1

Brazil

France

Indonesia

United

States Germany

Japan

Russia

Mexico China India

Nigeria

France

Italy

Luxembourg

Turkey

Indonesia

United States

Germany

Japan

Russia

Mexico

China

India Nigeria

Brazil

Global economy has grown six-fold in the past 50 years

SOURCE: The Conference Board Total Economy Database; McKinsey Global Institute analysis

1 Based on data for 99 countries, 1964–2014.

1964

2.9 billion

2014

6.6 billion

5.5

15.3

United States

10

7.0 5.5

70

5.0

50

4.5 6.0 1.0 0 1.5 0.5 3.0 2.5 2.0 3.5

80

40

0

6.5

60

90

30

20

4.0

Per capita GDP $ thousand, 2012 purchasing power parity

Country population Billion


Growth since 1950 surpassed the level of previous eras;

what can we expect over the next 50 years?

3.8

1.3

1.0

1950–2014 1900–1950

?

2014–2064E 1700–1900

G19 and Nigeria1 compound annual growth rate, 1700–2014

%

1 Data available for 12 countries in G19+Nigeria from 1900–50, 17 countries from 1950–63, and all 20 since 1964.

SOURCE: Jutta Bolt and Jan Luiten van Zanden, The first update of the Maddison Project: Re-estimating growth before

1820, Maddison Project working paper number 4, University of Groningen, January 2013; The Conference

Board Total Economy Database; McKinsey Global Institute analysis


Last 50 years of growth has been fueled in equal measure by

employment and productivity growth

SOURCE: McKinsey Global Institute analysis

Compound annual growth rate, 1964-2014

%

3.51.8

1.7

Productivity

growth

Employment

growth

GDP growth

NOTE: Numbers may not sum due to rounding.


Demographic tailwinds

turn into headwinds


Global employment growth is dropping dramatically in the next 50 years

G19 and Nigeria population, 1964–2064E

Index: 100 = 2014

SOURCE: The Conference Board Total Economy Database; United Nations Population Division; International Labour

Organisation; McKinsey Global Institute analysis


Global employment

growth is set to decline

from 1.7% per annum

to 0.3%—a drop to

less than one-fifth 42% Children and

elderly

Working-age

population

61% 68%

49

100

2014

58%

32%

122

2064E

39%

1964

DATA CHART!

DO NOT DELETE!

1.4%

p.a.

2014

32%

100

68%

Children and

elderly

58%

1964

Working - age

population

42%

49

0.4%

p.a.

39%

61%

2064E

122


2.5

2.0

1.5

1.0

0.5

0

2064 60 50 40 30 20 10 2000 1990

Employees in G19 and Nigeria, 1990–2064E

Billion, at best activity and unemployment rates, 2007–12

The global number of employees is likely to peak around 2050

SOURCE: The Conference Board Total Economy Database; United Nations Population Division; World Bank;

International Labour Organisation; McKinsey Global Institute analysis

Historical

Forecast

Peak employment

Total

Emerging

Developed

Emerging historical

Developed historical

Total historical

Emerging forecast

Total forecast

Developed forecast

China Brazil

2041

Saudi Arabia

2045

Turkey

2048

Mexico

2055

Argentina

2057

Russia

2011

India

2061

Germany

2000

Japan

2003

Italy

2010 South Korea

2024


Boosting participation among women, young people, and those aged

65-plus can only partially mitigate slowing of growth in the labor pool

Impact of increased participation and employment on total employment projection,

G19 and Nigeria, 2014–64E

Compound annual growth rate, %

SOURCE: United Nations Population Division; McKinsey Global Institute analysis

NOTE: In the best-case scenario, we assume a participation rate of at least 75% for women and an unemployment rate of less than 5%. For men, we

assume at least 90% participation and unemployment of 5% at most. For youth, the participation rate is at least 55% and the unemployment rate less

than 10%. Among those aged 65 and older, participation is more than 25% and unemployment less than 10%. Numbers may not sum due to rounding.

0.19

0.04

0.17

Women

25–64

0.03

0.04

0.03

Men

25–64

0.05

0.03

0.05

Youth

15–24

0.03

0.08

0.04

Older

65+

0.70

0.30

0.61

Potential

best-case

scenario

Emerging

economies

Developed

economies

0.40

0.10

Baseline

projection

0.31


Productivity will need to fuel global growth - and past 50 years show

widely varying performance across countries



Productivity growth rate, past 50 years (compound annual growth rate, %)

0.6

0.6

0.7

1.2

1.3

1.5

2.0

2.9

2.9

3.2

5.3

1.0

1.1

1.4

1.5

1.5

1.8

1.9

2.1

4.3South Korea

France

Japan

Australia

Nigeria

United States

Italy

China

Turkey

Canada

Germany

United Kingdom

Saudi Arabia

Argentina

India

Indonesia

Russia

South Africa

Brazil

Mexico

Average = 1.8

Developed

economies

Emerging

economies


Global growth outlook


Productivity-growth scenarios show a decline in the GDP-growth rate;

growth in per capita GDP declines in all but the most optimistic case

G19 and Nigeria

SOURCE: The Conference Board Total Economy Database; Jutta Bolt and Jan Luiten van Zanden, The first update of

the Maddison Project: Re-estimating growth before 1820, Maddison Project working paper number 4,

University of Groningen, January 2013; United Nations Population Division; McKinsey Global Institute analysis

1 Productivity growth from 1914 to 1964 derived by assuming same ratio of productivity growth to per capita GDP growth for 1914 to 1964 as in the period

from 1964 to 2014.

2 Assuming sustained average global productivity growth rate from 1964 to 2014.

3 Assuming sustained average global productivity growth rate from 2004 to 2014 (decade with the highest productivity growth in the past 50 years).

4 Compound annual growth rate of the past 50 years.

1.2% per annum1 2.5% per annum3 1.8% per annum2

Productivity-growth scenarios for the next 50 years

Change in GDP growth -57% -40% -21%

from 3.6% per annum4 to 1.5% per annum to 2.8% per annum to 2.1% per annum

+16% Change in per capita

GDP growth -47% -19%

from 2.1% per annum4 to 1.1% per annum to 2.4% per annum to 1.7% per annum


At past global rates of productivity growth, overall and per capita GDP

growth would slow down significantly

SOURCE: The Conference Board Total Economy Database; United Nations Population Division; McKinsey Global

Institute analysis

GDP growth

G19 and Nigeria

Compound annual growth rate, %

1.7

1.8

1.8

0.3

2.1

3.6

-40%

1 At past 50-year productivity growth rate.


Employment growth

Productivity growth

Past 50 years Next 50 years1

1.8

1.8

0.3

1.7

2.1

-19%

-0.2

DATA CHART!

DO NOT DELETE! GDP per capita growth

Past 50 years Next 50 years1

1.8

1.8

0.3

1.7

2.1

- 0.2

- 19%


1.0

1.4

2.2

4.3

1.5

2.1

2.0

1.9

2.0

7.0

3.4

3.3

3.1

2.9

2.4

2.2

2.2

2.1

At historical productivity-growth rates, GDP growth rates are set to slow

across the developed nations

NOTE: Future 50 years assumes past productivity growth. Numbers may not sum due to rounding. Not to scale.



Employment, productivity, and growth

Medium UN population scenario, best activity and unemployment rates, 2007–12

GDP growth

Change, % Compound annual growth rate, past 50 and future 50 years, %

South Korea

Australia

Japan

Canada

United States

France

United Kingdom

Germany

Italy

Prod dashed

Productivity

Emp next

Employment growth Productivity growth Developed

countries

Past

7

-73-39

-36

-53

-52

-10

-18

-36

-36

-34

SCALE CHART,

DO NOT DELETE!


7

-60

-37

-30

-66

-60

-23

-73

-27

-32

-30

0.6

3.8

3.7

2.0

4.9

1.7

3.6

1.4

5.3

1.6

1.3

7.5

5.3

5.1

5.1

4.6

4.5

4.0

3.7

2.9

2.6

1.6

…but also in the vast majority of emerging ones

NOTE: Future 50 years assumes past productivity growth. Numbers may not sum due to rounding. Not to scale.



Employment, productivity, and growth

Medium UN population scenario, best activity and unemployment rates, 2007–12

GDP growth

China

Indonesia

India

Saudi Arabia

Turkey

Nigeria

Brazil

Mexico

South Africa

Argentina

Russia

Prod dashed

Productivity

Emp next

Emerging

countries Change, % Compound annual growth rate, past 50 and future 50 years, %

7

-73

SCALE CHART,

DO NOT DELETE! Employment growth Productivity growth Past


Onus is on productivity to

sustain economic growth


Several opportunities to accelerate productivity growth

across all deep-dive sectors


Pushing the frontier Closing the gap

Size of bubble indicates relative impact within sector

Mechanization Yield increase by improved seeds, fertilizers. etc.

Waste reduction

Farm consolidation

Big data and precision farming

Operating efficiency improvements at plants

Agriculture and food manufacturing

China market consolidation

Restructuring to remove excess capacity in Europe

OEMs in India catch up to market leader

Infotainment and connected car

Higher value alternate fuel tech cars Auto

manufacturing

Shift to modern trade formats

Lean Store Ops

Merchandising best practices

Supply chain efficiencies

Advanced analytics

Automation

Online retail penetration

Retail

Innovative delivery models

Operational efficiencies

Reduced length of stay

Disease management programs

IT-enabled efficiencies

Big data solutions

Integrated care settings

New drugs and medical equipment

Health care


Pushing the frontier

6

Catching up

Emerging

4 75% 25% G19

82%

Developed

18%

45% 2 55%

On aggregate, there is plenty of potential to accelerate productivity growth

—and three-quarters comes from catching up


Based on MGI’s sector assessment,

lack of productivity opportunities is

not the constraint on growth

Potential productivity growth rate per annum

%


We identified 10 key enablers across four themes to unlock future growth


Enable catch-up by creating transparency and competition

Remove barriers to competition in service sectors

Focus on public and regulated sector efficiency

Invest in physical and digital infrastructure

Mobilize labor to counter the waning of demographic tailwinds

Improve education, skill matching, and labor market flexibility

Boost labor force participation among women, youth, and elderly

Help to push the frontier by incentivizing innovation

Foster R&D demand and investment

Capitalize on transformational

technologies

Harness the power of new actors through digital platforms and

open data

Craft regulatory environment incentivizing

productivity and innovation

Promote cross-border economic flows Further open up and

integrate world economy


About one-third of the productivity potential depends on

changes in government policy or action


Share of potential productivity growth, 2012–25

%

35

40

60

65

60

40

45

Agriculture

Retail

Automotive

90

95

7525

13

10

5

30

25

55

70

75

45

37 Simple average

across sectors

Not dependent on government action

Dependent on government action

Emerging economies All countries Developed economies


Need a new conversation about long-term growth


How much is

enough?

Is it

sustainable?

Can it be

equitable?

How should it

be measured?

@McKinsey_MGI

McKinseyGlobalInstitute

DOWNLOAD MGI RESEARCH AT

WWW.MCKINSEY.COM./MGI

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GLOBAL GROWTH: CAN PRODUCTIVITY SAVE THE DAY …€¦ · GLOBAL GROWTH: CAN PRODUCTIVITY SAVE THE DAY IN AN AGING WORLD? CONFIDENTIAL AND PROPRIETARY Any use of this material without