Investing for the next 20 years

Will slower economic growth mean lower returns?

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Key takeaways

  • Forecasts of gross domestic product (GDP) growth may offer insight into how stock markets and bond yields could fare in the future.
  • Population and productivity trends may slow global GDP growth over the next 20 years.
  • Slower growth could mean lower-than-average interest rates and lower stock market returns than in recent decades.

Over the past 20 years, the global economy has grown at an average annual rate of 2.5%, thanks to a variety of factors including rising globalization, advances in information technology, and increased trade. That growth has been accompanied by strong performances from both stock and bond markets. During the next 20 years, though, Fidelity’s Asset Allocation Research Team predicts that global GDP growth will slow to an average of 2.1% annually with potential consequences for financial markets. They base their forecast on productivity and population data from a wide set of countries and they see demographic trends including aging populations in developed economies as key factors that imply slow growth ahead. They also predict that the rapid growth rates that Asia's emerging market countries have enjoyed in recent decades may become more difficult to sustain as their pace of rapid industrialization slows.

Slower growth is not the same as declining growth, however, and the global economy is still likely to expand over the next 20 years. The US should average roughly 1.7% annualized growth and narrowly retain its lead over China as the world's largest economy. Emerging economies will likely grow faster and account for a greater portion of global growth over the next 20 years. These countries are projected to comprise about 50% of global GDP in 20 years, compared with about 40% now and 25% 20 years ago. This should help offset weaker outlooks for Japan and many European countries.

Why growth may slow

Economic growth results from increases in the number of people working and in the amount of output those workers produce. A country's labor force has a direct impact on GDP growth. It reflects the number of working age people who live there and the percentage of them who are either working or seeking work. In advanced economies, longer lifespans and low birthrates are producing aging populations that grow slower and tend to participate in the labor force at lower rates. As a result, developed economies such as Japan and parts of Europe are likely to see their labor forces shrink over the next 20 years as people live longer and birth rates remain low.

Immigration policies, however, could have a notable impact on these forecasts. In Europe, an influx of relatively young people could help offset the aging of the population, while more-restrictive policies could have the opposite effect.

While predicting population trends that affect GDP is relatively easy, making predictions about productivity is more complicated. For most of world history, productivity grew extremely slowly and economies generally expanded in line with their populations’ growth. At the start of the Industrial Revolution in 1820, the largest economies were China and India, which also had the largest populations. After that, technological innovation powered rapid productivity gains and by 1900, the US was the world’s largest economy, despite having only one-fifth as many people as China. Some economic forecasters believe the US possesses an inherent dynamism that will maintain this type of high productivity growth over the next 20 years, perhaps boosted by artificial intelligence, robotics, and other technologies.

Others believe the era of strong productivity growth is ending. They point out that per capita income has stagnated in the US and other developed economies, while technology seems less transformative than before. For instance, recent advances—such as mobile connectivity—have yielded consumer luxuries such as new smartphone apps rather than revolutionary innovations. Fidelity's analysts believe both perspectives suffer from a narrow focus on the US and do not reflect a global economy in which emerging countries account for a large share of output. Instead, they forecast productivity growth by looking at 3 proven drivers of productivity, which they call people, structure, and catch-up potential.

The educational and scientific achievements of a nation’s people is sometimes referred to as its human capital, and the higher the human capital, the more productive its economy. The human capital measured by educational and scientific achievement that has accumulated over the past 2 decades should boost global growth in the next 2 decades by driving innovation and adoption of new technologies.

Structurally complex economies tend to be competitive, use technology effectively, and possess healthy business climates and institutions. They also typically produce a greater and more sophisticated variety of products than other economies.

An additional driver of productivity growth is the ability of less-developed countries to grow quickly from low levels of development, adopt existing technologies, and catch up to the higher income levels of developed countries.

Some developing economies such as South Korea have grown greatly over the past 20 years and their rapid increase in industrialization and income has left less catch-up potential for the years ahead. The silver lining, though, is that their increased complexity and human capital may boost their future productivity.

Meanwhile, poorer developing countries such as India and Indonesia have made relatively less progress and retain considerable catch-up potential.

In between lie countries such as China and Malaysia, which face the challenges of middle-income countries but with more sophisticated human capital and complexity than many others.

Why GDP matters for investors

Economic growth influences corporate earnings growth, interest rates, and many other factors that affect the long-term performance of financial markets. Slower global growth may mean less support for stock market returns over the next 20 years than has existed since the end of World War II. Slower growth will also matter for bond investors if interest rates remain lower than their historical averages.

To be sure, while GDP forecasts can provide guidance for investors seeking to set realistic expectations for future returns from their portfolios, other factors such as stock market leverage and valuation dynamics will also play a role in how stocks perform. For bonds, GDP growth may affect interest rates, but investors should also bear in mind starting yields and other considerations. It’s also important to remember that the expansion and contraction of the business cycle will also move markets over the shorter term.

We should also note the near-term effects of the COVID-19 pandemic. Amid lockdowns and closures, businesses and economies worldwide suffered severe setbacks, causing a large enough GDP decline to drag down the average annual GDP growth realized over the past 20 years. While we expect the global economy to recover some of these losses, we are still assessing the longer-term effects of the pandemic, which may have precipitated some permanent changes in global growth potential.

As an old saying goes, "It's tough to make predictions, especially about the future." However, those investors whose portfolios are well diversified across a broad, global opportunity set may be best positioned to take advantage of future growth, slower though it may be.

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