The three challenges confronting global growth

In China there is already a big reduction underway in the working age population over the next 10 years. Photo / AP

HSBC’s chief Asia economist Frederic Neumann singles out enormous demographic changes as one of the major challenges confronting global growth.

Neumann, in Auckland for the meeting of the Apec Business Advisory Council (Abac), points to three “buckets” which “really deliver challenges” – comprising demographics, geopolitics and climate change.

Neumann, who has been running HSBC’s Asia economics team for more than a decade, is brilliantly placed geographically when it comes to looking at the impact of changing demographies.

“We always look at Japan as being a template as to what happens to ageing populations,” he says. “We see growth decline. You see inflation decline and suddenly many other economies are caught up in an equally large demographic shift - not least of them is China.”

Neumann notes there is already a big reduction under way in the working age population in China over the next 10 years. “Demographics alone will deduct about one percentage point off China’s GDP every year,” he predicts, saying this may reduce China’s annual growth rate from an estimated 5 to 4 per cent.

“That is an enormous reduction in growth in the second-largest economy in the world.” He predicts similar demographic changes will take place in Korea, Thailand and Europe. “Even the US is not immune to this but of course the US has immigration to make up for that.”

Asked what economies can do, Neumann says really apart from immigration and “maybe having more babies”, the answer is increased productivity and the use of technologies like AI.

“Japan has been able to cushion the effect by raising female participation in the workforce through ‘Abenomics’.

“That avenue is not there for China because the female participation there is already very high.”

Frederic Neumann is HSBC’s chief Asia economist. Photo / Fran O'Sullivan

Neumann contends that with geopolitics the world is looking at the end of the peace dividend it has enjoyed since the end of World War II. “It is not just the rise of big power tension, there are also domestic political developments which are concerning.

“The rise of protectionism is understandable and where it comes from socially and politically,” he says. “But if we close off ourselves from trade and investment there will be huge losses and a large impact on growth over time.”

Climate change is the third major challenge.

“In the near term it is quite disruptive with more erratic weather patterns,” he notes in a nod to the cyclonic conditions affecting Auckland.

But Neumann contends it is not all negative because it has spurred substantial investment in generating new forms of energy.

“The answer is bringing down the cost of energy so that newer forms like solar and wind power can compete without subsidies,” he says. “That energy revolution requires a lot of upfront spending but once it’s installed it brings down the cost dramatically and ultimately human prosperity is fuelled by the application of energy.”

“The cheaper the energy the greater the prosperity.”

McKinsey and Company’s Andrew Grant believes one of the most interesting aspects affecting the business community globally is that geopolitics now trumps capital markets. “It’s a very bold statement when you think about how an executive team goes around running things and it will impact on boards.”

Grant, who heads McKinsey’s global public sector practice, also addressed Abac delegates on emerging trends.

“I think there is a narrative around, that business leaders should shape or be shaped,” he told the Herald. “Doing commerce with each other has been a wonderful thing for humanity. But business leaders are saying we would like more of a voice in this and we would like to be a constructive force in terms of how we understand the no-go areas and understanding the tensions the world has.

“Realising commerce and trade and working with each other is a powerful underlying force for good.”