Medium and Long-term Global Economic Outlook · differ depending on the trends. Furthermore, from...

Summary

Global trends: global order will be fragmented; domestic economic disparity

will expand; real and cyber society will be integrated.

China will likely surpass the United States in the economic scale until 2030,

and the economic power will shift to Asia.

Japan should implement the five imperatives to realize “a society where

challenges and reforms nurture affluence.”

Medium and Long-term Global Economic Outlook(FY2018-FY2030)

2Copyright (C) Mitsubishi Research Institute, Inc.

Megatrends in the Global Economy

The rise of China's economy has become significant since the 2008 Financial Crisis.

International order in the past has based free market and democracy as common principle.

However, we are facing a major turning point at the moment. With the development of the

emerging market, represented by China, we are shifting from single to multi order world of

fragmentation. This change enhances another important moment, the State Capitalism– a

system in which the government functions as the leading economic player and uses markets

primarily for its political gain.

In Europe and in the United States, the expansion of domestic economic disparity and

social divide have fully materialized due to two major reasons: (1) weak redistribution

functions of wealth; and (2) globalization of supply chains. There can no longer be any

doubt that we are going through a populism and protectionism age. In China and other

emerging economies, various social issues such as environmental and aging concerns are

becoming increasingly serious in line with the rise in their economic levels.

Amid the increasing political and economic uncertainties throughout the world, the

necessity for resolving societal issues through innovation has become significant.

Implementation of new technologies into society will be a driving force for both developed

and emerging economies, to reach to a sustainable and affluent society.

Based on this understanding, we have categorized into four areas, the major trends that

will impact the world economy up to around 2050. They are politics/geopolitics,

economics, society and technology (Figure 1). The timing and impact of their urgencies will

differ depending on the trends. Furthermore, from the long term trend above, we have

extracted five major trends that will shape the global economy in 2030.

(1) Fragmented global order and State Capitalism

(2) Shift of the Economic Power to Asia

(3) Expansion of Domestic Economic Disparity throughout the World

(4) Circular Economy through Growth of Sharing Business

(5) Integration of Real and Cyber Society

Figure 1: Trends that will influence the appearance of the global economy over the

long term

Source: MRI.

Social

Politics Economics

Technology

Shift of Economic Power to Asia

Overtake of China-US/India-Japan

Expansion of Young Islamic Economy

Catch up of Developing Economies

Multi-poralization

The State Capitalism

Centralization and Decentralization

Geopolitical Risks Expansion

Aging Society

Economic Disparity and Social Divide

Circular Economy through Sharing

Integration of real and cyber society

政治政治

政治政治

AI, IoT and Robotics around us

Integrating Data in whole World

Tech Growth under severe Medical Divide

Tech Solutions to Resource Problems

Growing Attentiond to the Climate Change


Trend 1: Development of Fragmentation and Spread of

State Capitalism

Fragmentation of global economy

With the development of China and other emerging economies, the world economy is

shifting from the one dominated by the United States and Europe to a more fragmented

structure. The trend of fragmentation will continue towards 2030 as China, followed by

India, ASEAN and other countries increase their shares in the global GDP. Using the

Herfindahl-Hirschman index (HH index), MRI calculated the degree of concentration of

the economy (Figure 2). The HH index has remained steady at a certain level since the

period of Japan’s rapid growth. However, as China and other emerging economies have

expanded their GDP shares, the HH index started to decrease again from 2005. Since

various emerging powers will grow through 2030, MRI forecasts that the concentration of

global GDP share will gradually decline in the future and the trend of fragmentation will

continue.

State Capitalism

State Capitalism countries are projected to increase their presence in the global economy.

The difference between State Capitalism and free market capitalism is not necessarily

obvious. However, the presence of state owned enterprises was used in this report as an

indicator to quantify State Capitalism. Countries where the ratio of people working for state

owned enterprises exceeds global average are defined as those with State Capitalism

tendency. Based on this definition, the GDP share of State Capitalism countries is expected

to increase to over 30% towards 2030.

The State Capitalism countries do not necessarily respect the rule-based multilateral

frameworks developed by the United States and Europe, such as WTO and IMF, so long as

such framework does not directly benefit their regime. China is expressing her intention to

rewrite the global order. Even within the free economy, Trump Administration is pursuing

its own economic diplomacy. There are concerns that free market tide may decline towards

2030.

Figure 2: Herfindahl-Hirschman index calculated based on the GDP shares of various

countries

Note : The GDP for Europe has been calculated by adding the GDPs of the current EU member countries.

Source : “World Development Indicator” (World Bank) and MRI staff estimate.

500

1,000

1,500

2,000

2,500

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60

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65

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75

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80

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85

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90

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95

20

00

20

05

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10

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15

20

20

20

25

20

30

(Index)Rapid economicgrowth of Japan

Growth ofEmerging Economies

Forecast


Trend 2: Shift of the Economic Power to Asia

Source : “Maddison Historical Statistics”, “World

Development Indicator” (World Bank) and MRI

staff estimate.

Asian economies will continue to make rapid

growth. It is expected that the GDP share of

Asian countries will rise from around 20% of

the global GDP in 2000 to nearly 40% in

2030 (Figure 3). It should also be emphasized

that China will become No. 1 in the world in

terms of economic scale, with its GDP

exceeding that of the United States by 2030,

and the age of Asia lies ahead. Due to

technological advances, India, ASEAN and

other Asian countries have room for per

capita GDP growth.

This economic growth is expected

notwithstanding the structural problems

these countries are facing of current account

deficits, fiscal deficits, and private debts.

Trend 3: Expansion of Domestic Economic Disparity

throughout the World

Over the decades, growth has occurred in all regions of the world including developing

countries. The gap in economic levels between the United States and emerging economies

has narrowed (Figure 4, left).

Meanwhile, the domestic economic and social disparities have expanded in both

developed and emerging economies (Figure 4, right). Major reasons behind the expansion

are: (1) the imbalance between high corporate earnings and weak wage increases; (2) the

persistent inequality in education; and (3) the rise in the unemployment rate among young

people. Such disparity causes division of society in both developed and emerging

economies. In addition, concentration of profits is expected to further increase in the

future due to the thriving of AI/IoT and other digital-related businesses, and domestic

economic disparity is likely to further expand through 2030.

Figure 4: Distribution of income in countries according to income level with the figure set as

100 for the United States (left) and distribution of countries according to income

share by the upper income class (right)

Figure 3: Global GDP share of major

countries

Note : Among the countries listed in the World Bank “World Development Indicator,” the per capita GDPs of those countries

with relevant data for the decades indicated have been tabulated in the figure on the left, with the per capita GDP for

the United States set as 100. With regard to countries listed in the World Inequality Database, the income share by the

upper 10% income class has been calculated in the figure on the right.

Source : “World Inequality Database”, “World Development Indicator” (World Bank) and MRI staff calculation.

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60

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90

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00

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United States China IndiaASEAN Europe Asia (Total)Japan（%）

Forecast

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0~

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2~

5

5~

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~2

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~5

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~1

00

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0~

2010's (N=191)

1980's (N=157)

（%）

Income Level (US=100)

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~2

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2010's (N=37)

1980's (N=28)

（%）

Income Share of TOP 10%


Trend 4: Circular Economy through Growth of Sharing Business

Note : Number of consumer-use devices excluding those for business use.

Source : “Consumer Barometer” (Google) and MRI staff estimate.

Amid the wave of globalization, a trend to

create a self-sufficient Circular Economy

within single economic sphere, is expected to

expand. There are three major factors to

promote the trend towards 2030: (1) progress

in local production for local consumption; (2)

sharing business expansion which reduces

demands for physical resources; and (3)

expansion of resource recycling (Figure 5).

There is a strong trend toward Circular

Economy which creates new supply chain,

including recycling, within the scope of a

regional economic zone.

Trend 5: Integration of Real and Cyber Society

Progress in digitalization of information

Full-scale implementation of IoT will progress and the number of consumer devices

connected to the Internet will likely increase to 50 billion globally by 2030 (Figure 6).

Information that has not been digitized before will be captured and stored in cyber space at

explosively rapid pace.

The emergence of cyber society

Our daily work and life will become more convenient due to advances in AI,

communication technology, etc. Resolution of many societal problems will become

possible. Also, businesses that can be completed within cyber space are expected to

increase. These changes contribute to the emergence of a “cyber society”, where various

activities are mingled and carried out by integration of real and cyber world.

Digital Hoarding

Meanwhile, the trend of digital hoarding will become more rigid. The digital hoarding raises

another trend of data bi-polarization between data that freely circulates in cyber society, and

data that is bound by regions and corporations. As a result, we will see more of

fragmentation in the digital world.

Figure 6: Per capita number of devices connected to the Internet

Figure 5: Shift toward a recycling-oriented

society will progress through

localization and sharing

Source: MRI.

Recycle

(3) Sharing business owner collects disused articles and proceed recycle

Local production and sharing business shape the Circular Economy

(2) Sharing business reduces demands for physical resource

(1) Progress in localProduction reducesthe import

Intermediate

Final Goods

Operation &

Maintenance

R&D/

Production

0

5

10

15

2012 2017 2030

Japan(Devices) Forecast

0

5

10

15

2012 2017 2030

United States

(Devices) Forecast

0

5

10

15

2012 2017 2030

China(Devices)

Forecast

0

5

10

15

2012 2017 2030

World(Devices)

Forecast


Note 1 : Since the result will differ significantly depending on the assumed exchange rate, it is necessary to view this over a

broad range. The growth rates are MRI’s prediction. While basing the exchange rate on assumptions in the IMF “World

Economic Outlook,” partial revisions have been made. China’s nominal GDP is based on the assumption that yuan

appreciation will progress at a rate of slightly less than 1% through 2030, and India’s nominal GDP is based on the

assumption that rupee appreciation will progress at a rate of about 0.5% per year, while that for Japan is based on the

medium and long-term outlook prepared by MRI.

Note 2 : ASEAN 10 refers to the following 10 countries: Indonesia, Thailand, Malaysia, the Philippines, Vietnam, Singapore,

Myanmar, Laos, Cambodia, and Brunei.

Source : “World Economic Outlook” (IMF) and MRI staff estimate.

Global Economy in 2030 based on the Five Trends

The above five trends bring dramatic changes to the global economy in 2030. If the stable

economic environment continues, China will surpass the United States in the economic

scale, while both India and ASEAN also will surpass Japan (Figure 7).

US economy : While strong innovation and new businesses will underpin economic vitality,

mismatch in the labor market and expanding domestic economic disparity will become a

burden, and the US growth rate is expected to fall from around 2% in 2020 to the upper

1% level through 2030.

European economy : While the conservative corporate behavior and the decline in quality

of human capital will be a downward factor, the rise in productivity in Nordic countries, etc.

through the development of advanced technologies will sustain the European economy. As

a result, European economy is expected to maintain a growth rate of the upper 1% level

until 2020. After that, the growth rate is expected to fall to the upper 0% level in line with

the decline in the working-age population.

Chinese economy : Due to the decline in the working-age population and slowdown in

the growth of traditional industries, the growth rate of the Chinese economy is expected to

gradually decelerate from the mid-6% level in 2020 to near the 4% level through 2030.

ASEAN economy : Although the working-age population will decelerate slowly,

productivity will continue to rise. As a result, the growth rate of the ASEAN countries is

expected to maintain 4% level through 2030.

Indian economy : Thanks to such factors as increase in the young population and

continued expansion of domestic demand due to the rise in income levels, India's growth

rate is expected to maintain around the 6% level through 2030.

Figure 7: Comparison of the scale of nominal GDP of major emerging

economies and developed countries

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United States Japan China

India ASEAN10 EU(trillion $)

Forecast

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ASEAN10

(trillion $)

Forecast


Standard Scenario and Growth Scenario of the Japanese

Economy

The natural potential growth rate will be about 0%

Amid shrinking and aging population, the potential growth rate of the Japanese economy

will gradually decline to around 0% in 2030. The improvement of the GDP gap leads

Japanese economy out of deflation. However, with the continuing trend of the aging

society, the Government’s fiscal situation will even worsen. Consequently, the budget

deficit will expand and the outstanding debt will likely increase.

Five imperatives for implementing blueprint of the Japanese

economy

MRI proposes that Japan should pursue “a society where challenges and reforms nurture

affluence” as the blueprint. Here “affluence” refers not only to the economic affluence but

also to the overall satisfaction of livelihood, including social connection, joy of work and

health. Five imperatives necessary for implementing the blueprint are as follows: (1)

transforming society through innovation; (2) taking advantage of the growing global

demand; (3) self-directed and proactive learning; (4) developing sustainable local

economies; and (5) transforming fiscal and social security systems supporting 100-year-life.

The growth scenario will push up real GDP by about ¥80

trillion

Implementation of the five imperatives will likely increase the growth rate in 2030 by about

1% from the natural growth rate of around 0%(Figure 8). If we resolve societal issues

through challenges and transformation, Japan will realize a society that nurtures affluence.

If Japan can achieve this, she will not only maintain a certain presence in the world but also

increase its per capita GDP by about ¥700,000. The fruit of the economic growth can be

allocated to future investments and hence Japan will realize a sustainable economic society.

Figure 8: Pushing up real GDP by ¥80 trillion through realizing the growth

scenario

Source：“System of National Accounts”(Cabinet Office) and MRI staff estimation.

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（Trillions of chained 2011 yen）

Standard scenario

Reform scenario

¥639 trillion

¥562 trillion

About ¥80 trillion

Forecast

-0.5

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（%）

Standard scenario

Reform scenario+1.4%

+0.2%

About +1.2%

Forecast


Point 1: Transforming Society through Innovation

To achieve the future that Japan should target, it is important to resolve a variety of societal

issues through innovation based on new technologies. There is high expectation for

innovation to solve problems in daily life and to improve quality of life. According to our

“Survey on Exciting Future Living” targeting 5,000 consumers, there is strong demand for

products and services that help resolving such societal problems as wellness and mobility.

We estimate a potential consumer market of ¥50 trillion in 2030 which is roughly 15% of

total household expenditure (Figure 9).

Figure 9: Size of the potential consumer

market for services in the future

is ¥50 trillion

New investments are also necessary to achieve affluent society in the future. We estimate

the required domestic investment amount by 2030 is about ¥200 trillion yen (cumulative

investment from 2018 to 2030) (Figure 10). It should be noted that the preliminary

calculation of the required investment amount here is not directly linked to the estimate of

the potential consumer market mentioned above.

In order to promote innovation, it is important for corporations to challenge developing

new businesses. In addition, it is also important to reform regulations to accelerate social

implementation of digital technology, and to streamline rules and policies to promote data

distribution.

Figure 10: Cumulative total of about ¥200 trillion required for realizing

the future society

Source: MRI.

Note : Market size has been calculated by

multiplying the population by the rate of

desire to use (services) and the

willingness to pay (for the services).

With regard to the willingness to pay,

the upper 25% point in the distribution

of the consumer willingness to pay was

used for people who replied that they

“want (future services) to be absolutely

realized,” while the average of the

distribution of the consumer willingness

to pay was used for people who replied

that they “would use (future services) if

available.” A preliminary estimate of the

size of the market for various goods

and services was made by using the

population derived by multiplying

gender by age groups in 2030.

Source : The survey panel of MRI’s “Market

Intelligence Forecast (mif)”.

15

98

3

9

42

Healthcare

Mobility

Security and resilience

Energy

Automation and improvement of efficiency

Regional revitalization

Education and cultivation human resources

¥50Trillion

Renewable energy：¥25 trillionEnergy-saving：¥40-60 trillion

Energy

¥65-85 trillion

Mobility

¥15 trillionSelf-driving car・EV・MaaS：¥35 trillionDecrease of gasoline car：▲¥20 trillion

Healthcare

¥20-45 trillionImprovement of productivity in medical and long-term care services：¥20-45 trillionHealth-related market：¥2-5 trillion

Digital technology

¥65-90 trillionNew digital products(Ex: robotic process automation, factory automation) to improve productivity：¥65-90 trillion


Point 2: Taking Advantage of Global Demand

The current trend of “local production for local consumption” and building demand-

oriented value chains is likely to further accelerate through 2030. This trend will also bring a

major change to the current account structure in Japan. Although localization will decrease

export of goods from Japan, return on investments and payment receipt of services will

increase. Led by Asia, global direct investment market is expected to expand from $1.6

trillion (average during the period between 2014 and 2016) to $3.4 trillion through 2030

(Figure 11).

The acceleration of the cross-border investment from Japan will increase return on

investments such as dividends and payment of services related to intellectual property

rights from overseas subsidiaries. In order to realize such multifaceted earning, the

following two points are required: (1) to lead the world by generating an economic order

based on free and fair rules without giving in to the trend of protectionism; and (2) to

enhance competitive edge of core products; and to enhance value added by combining

upstream (high value-added materials and parts) and downstream (operations fully utilizing

IoT technology).

Figure 11: Forecast of the size of the cross-border direct investment market

Note : The value forecast for 2030 has been calculated by multiplying the GDP by the direct investment ratio. The GDP forecast

was done by MRI, while it is assumed that the ratio of direct investment to the GDP of various countries will rise

gradually in line with the trends since 1980.

Source : “Foreign Direct Investment”(UNCTAD), “World Economic Outlook” (IMF) and MRI staff estimation.

EU

China

Other Asian countries and Oceania

（Including India, ASEAN and Australia)

United states

Central and South America

CIS

Sub-SaharanAfrica

North Africaand Middle East

Eastern Europe

8％

15％

7％

8％

Inner circle：The result value during 2014 and 2016Outer circle：The predicted value in 2030Percentage ：The share of Japan in cross-border direct

investment in each region

Note

The average during 2014 and 2016

(2030)( )

The market size of cross-border direct investment

$1.6 trillion→$3.4 trillion( )


Point 3: Self-Directed and Proactive Learning

The job condition in Japan will change dramatically in the future. The shortage of human

resources will continue to be a serious problem until the early 2020s with the declining

birthrate and aging population. However, dissemination of digital technology will decrease

the demand for labor-force and promote unmanned operations, resulting in surplus of

human resources after the mid-2020s. At the same time, a mismatch in the labor market,

such as a shortage of 1.7 million professional workers is expected for supporting the

technological innovation.

In this report, we categorized all occupation into two axes –routine/non-routine and

cognitive/manual– to characterize the task and skill of human resources required for

professional work. Using this chart and analyzing each segment where employees are

concentrated, the share of non-routine segment, where most professional workers are

located, is only around 20% in Japan. This is two-thirds of the United States and one-half

of the UK. In the Japanese labor market, about 80% of workers have remained in routine

type tasks in 2015 (Figure 12).

Figure 12: International comparison of human resources portfolios

(2005-2015)

If workers do not shift to non-routine type tasks at the macro level, about 80% of

Japanese human resources will be exposed to the competition with robotics and AI. To

resolve skill mismatch in the Japanese labor market, self-directed and proactive learning

becomes important. The following four points will be the solution for the self-directed and

proactive learnings: (1) changing people’s mindset; (2) clarification and disclosure of

occupational information; (3) providing life-long learning programs and support for

occupation changes; (4) promotion of human resources challenging creative businesses.

Note 1 : The two axes were defined as

follows: “routine ⇔ non-

routine” was set for the vertical

axis, while “manual ⇔cognitive” was set for the

horizontal axis, following earlier

studies by Autor, Levy, and

Murnane (2003), etc.

Note 2 : The numerical values in the

figure indicate shares in 2015.

Source : O*net (US), Office for National

Statistics (UK), Population and

Housing Census (Japan) and

MRI staff calculation.


Point 4: Sustainable Local Economies

By 2030, we will probably be able to freely choose where to live, where to work, and where

to consume, thanks to development of digital technology. There is a possibility that the

excess concentration of population and industry in the Tokyo metropolitan area will be

resolved, and many people can choose areas to live based on well-being of environment,

richness of culture and history. Through synergies among people moving into these areas

and the locals, new business opportunities may be created. To strengthen regional power, it

is important to upstart local innovation by combining human resources, entrepreneurship

and local power. Local innovation will lead not only to resolving local societal problems but

also to take advantage of global demand.

Point 5: Fiscal and Social Security Systems Supporting 100-Year-

Life

Digital technology, local community, and systemic reforms

Japan's social security system is experiencing institutional fatigue in the “super-aged society”. In

view of an era of 100-year-life, Japan needs to implement systemic reforms toward avoiding

excessive services and expanding the range of self-help as soon as possible. Furthermore, if new

technologies enable many elderly people to live without support, they in turn can contribute to the

local communities. Independence of the elderly people also contributes to extending healthy life

expectancy. Following measures are necessary for both improving the quality of life and maintaining

sustainable social security system: (1) systemic reforms, (2) utilization of new technologies; and (3)

mutual support in local communities.

Realistic options for financial reform

The government has extended the target period for achieving surplus in the primary balance to 2025.

However, it still may be difficult to achieve despite the extension. In financial reform, cuts in

government spending and tax increase are essential in addition to growth strategies. Achieving

surplus in the primary balance becomes possible by combining the following three points: (1)

realization of a growth scenario; (2) suppression of the annual increase of social security related

expenditures to 400 billion yen; and (3) raising the consumption tax rate to 13%(Figure 13).

Figure 13: Combination of choices to make primary balance in FY2025

Source: MRI.

Growth Expenditure suppresion Revenue expansion

Real GDP growth rate

(FY2019-2025)

Social security expenditure

(FY2019-2025)

Consumption tax rate

(Untill FY2025)

PB deficit in

FY2025

Standard scenario 0.5% +\0.9 trillion/year 10% ▲¥15.4 trillion

The consumption tax rate 0.5% +\0.9 trillion/year 16%

to make PB profitable +6% increase

(Reduced amount of PB deficit) \15.4 trillion

0.9% +\0.5 trillion/year 13%

+0.4% increase \0.4 trillion/year decrease +3% increase

(Reduced amount of PB deficit) \5.0 trillion \3.3 trillion \7.1 trillion

Eliminated deficit

(±¥0 trillion)The combination of

three choices


48.0

38.3

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The share of the top 1% in national wealth

The share of the top 1% in national income

before taxes

（%）

Th

e G

reat

Dip

ression

US Economy：

Despite Being Sustained by Innovation, Burden of

a Divided Society Remains

Environment peculiar to the United States that fosters innovation

The contribution of total factor productivity (TFP) is significant in the economic growth of the

United States over the medium to long term. The high level of TFP in the United States is

supported by active creation of innovation, and is based on the following three strengths: (1)

sufficient R&D investment; (2) abundant funding to entrepreneurs (Figure 14); and (3) federal

policies boosting innovation. Under such environment, productivity growth due to innovation is

expected to continue in the future.

Three structural problems

However, there are also concerns that economic growth of the United States can be suppressed.

Those are the following three areas: (1) division of the labor market due to structural problems; (2)

division of domestic society due to increasing economic disparity; and (3) separation from

international society that will be left behind by the Trump administration.

The structural problem of the labor market is thought to be a factor to drag down the labor

participation rate in the United States. Also, it is aggravated by insufficient support of training

programs for adult workers. Long-term stagnation of the labor participation rate will push down

human resources in terms of both quantity and quality.

Economic disparity in the United States is expanding (Figure 15). Also, the disparity tends to be

fixed through generations partly because of the sharp increase of university tuitions. The surge in

tuition fees of universities is making it difficult for students from low-income families to access

university education. If the economic disparity further widens in the future, productivity growth will

be suppressed through reduction of innovation.

Adverse effects of the Trump administration may harm the US economy over the medium to

long term. An example is the unilateral and unreasonable claim by the United States toward other

countries through its protectionist policy. It may create conflict with other countries and will make it

difficult for the United States to join new trade agreements in the future. If the United States is shut

out from the framework of free trade, she may lose advantage in economic and international politics.

Figure 15: Disparities of assets and

income in the United States

0.0

0.1

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om

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Jap

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Ital

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Early stage

Later stage

（%）

Figure 14: Ratio of VC investment to

GDP

Note : The data is from 2016.

Source : “Entrepreneurship at a Glance 2017” (OECD).

Source: World Wealth & Income Database.


European Economy:

Growth Slowing Down due to Aging;

Backpedaling EU Integration Is a Risk

Growth of productivity is the challenge

In the EU, economic growth is expected to fall to the upper 0% level after 2020, due mainly to the

decrease in the working-age population. To maintain long-term growth, the common challenge in

Europe is the productivity growth. The potential growth rate in the future depends on whether total

factor productivity can be increased under the progress in aging and the slowing down of capital

accumulation in Europe.

Spillover of innovation

There is a possibility that the innovation power of the EU will significantly improve in the future. In

fact, many countries with high innovation ability are included in the EU region (Figure 16). The

overall innovation ability of the EU will be raised if the innovation spillover, such as knowledge and

technology as well as the adoption of policies and systems of countries with high innovation abilities,

spread through the EU region.

Issues on business sector and labor market

However, we must be aware of the low expected growth in the corporate sector and delays in

accumulation of human capital. First, the expected growth rate in the corporate sector is declining in

many countries within the EU. If this situation continues in the future, it could lead to a slowdown

in the improvement of innovation ability and productivity growth resulting from restraints on entry

of enterprises and reduction of investment. Second, high unemployment rate causes the delay in

human capital accumulations, mainly among young people. Declining human capital will not only

slow down productivity growth but also reduce labor mobility to new growth industries.

Further EU integration is not straightforward

The direction of further EU integration in the future includes: (1) unification of the deposit

insurance system; (2) unification of capital market rules (financial alliance); and (3) strengthening of

macro stabilizing function through fiscal measures within the eurozone (fiscal alliance). However,

skeptical views on the EU integration have been prevailing since the financial crisis and the

European debt crisis. Further integration of EU will not move forward in a straight line as a

common consensus of the member countries.

Figure 16: Global innovation index ranking

Note : 2017. The UK, which has decided to withdraw from the EU, has been counted as a non-EU country. The

value for the EU is the average of the combined GDPs of each member country. Orange bars indicate EU

member countries, blue bars indicate developed countries other than EU members, and gray bars

indicate emerging economies other than EU members. The definition of developed countries and

emerging economies is according to the IMF.

Source : “Global Innovation Index” (Cornell INSEAD WIPO) and MRI staff calculation.

70

80

90

100

110

120

130

Swit

zerl

and

Swed

en

Net

herl

and

s

Un

ited

Sta

tes

Un

ited

Kin

gdom

Den

mar

k

Sing

apor

e

Fin

lan

d

Ger

man

y

Irel

and

Kor

ea, R

epu

blic

of

Lux

emb

ourg

Icel

and

Japa

n

Fra

nce

Hon

g K

ong

(Ch

ina)

Isra

el

Can

ada

Aus

tria

Nor

way

New

Zea

land

Chi

na EU

Aus

tral

ia

Cze

ch R

epub

lic

Est

onia

Mal

ta

Bel

gium

Spai

n

Ital

y

Cyp

rus

Por

tuga

l

Slov

enia

Lat

via

Slov

akia

Un

ited

Ara

b E

mir

ates

Bu

lgar

ia

Mal

aysi

a

Pol

and

Hu

nga

ry

Lit

hua

nia

Cro

atia

Rom

ania

Tur

key

Gre

ece

Ru

ssia

n F

eder

atio

n

（The average of developed countries=100)


Chinese Economy：

Slow Reform on Structural Problems Causes

Concern despite Growth in New Industries

China catching up the United States

In China, the working-age population has already entered a declining phase. In aging society with

declining working-age population, innovation is key for economic growth. We compared China's

innovation power on global basis using the global innovation index which consists of input and

output indicators. The composite index indicates there is still a gap between China and the United

States. Meanwhile, China is already close to the level of the United States when measured in the

output index (Figure 17).

Huge government support and investment boosting innovation

China’s innovative power is boosted by huge government support and investments. The major

investors are venture capitals and PE funds that have expanded in scale in recent years. Current

investments to venture firms have been noticeably biased towards the coastal areas. The key to

medium- and long-term growth of the Chinese economy is whether clusters like those in Shenzhen

will emerge in the inland areas in the future.

The Belt and Road Initiative (BRI) is another important key for the sustainable economic growth

in the long run. The BRI is assumed to have the following four objectives: (1) development of

inland part of the country; (2) solving over capacity of manufacturing facilities; (3)

internationalization of the Renminbi; and (4) contribution to security measures, including resource

security. Currently, progress differs by each objective. However, since the long-term vision is clear,

the achievement of the vision will likely accelerate in the future.

Nonperforming loans and possible burst of bubble

Meanwhile, the Chinese economy carries many risks. The following three risks warrant caution: (1)

overcapacity of industrial production; (2) rapid contraction of private debts due to emergence of the

nonperforming loan problem; and (3) delays in reforming the social security system.

To grasp the risk of China's nonperforming loan problem, we made comparison with the post-

bubble level in Japan. After the bubble burst in Japan, the amount of nonperforming loans stayed at

a level of approximately 4% to 8% of the GDP. Meanwhile, the amount of China's nonperforming

loans is estimated to be about 4.2% of its GDP. This level is close to that of Japan in 1995, after the

collapse of the credit bubble. If the bubble of the nonperforming loans market in China bursts and

the prompt liquidation is required, it may add downward pressure on the economy to the same

extent as during Japan's bubble burst.

Figure 17: Global innovation index(Composite: Left, Output: Center, Input: Right)

Note : CHE represents Switzerland, DEU represents Germany, KOR represents Korea (Republic of), JPN

represents Japan and CHN represents China.

Source : “Global Innovation Index” (Cornell INSEAD WIPO) and MRI staff calculation.

CHN

KOR

JPN

DEU

CHE

USA

60

70

80

90

100

110

120

130

2008 2017

（USA=100） Composite

CHN

KOR

JPN

DEU

CHE

USA

60

70

80

90

100

110

120

130

2008 2017

（USA=100） Output

CHN

KOR

JPNDEU

CHEUSA

60

70

80

90

100

110

120

130

2008 2017

（USA=100） Input


ASEAN Economy：

Continuing Moderate Growth while Bearing

Structural Problems

ASEAN economy sustaining growth

We forecast that moderate growth will continue in ASEAN economy, in consideration of the

following three points: (1) increasing population; (2) improvement of technical capabilities through

direct investment and expanding manufacturing network; and (3) increasing exports to growing

China.

ASEAN’s population will increase up to 730 million in 2030, in line with the working-age

population ratio reaching 67% by 2030. Population will grow parallel to income, resulting in rapid

growth of consumption within the region.

Manufacturing network of ASEAN is developed by abundant incoming direct investment and is

being molded into the global supply chain. Further expansion of manufacturing network is expected

in the future.

With regards to the relationship with China, the share of ASEAN export to China has been

increasing gradually. If the labor cost of China continues to increase and imports are stimulated by

the Belt and Road Initiative, the ASEAN exports to China will further expand.

Structural problems in ASEAN member countries

There are number of risks associated with ASEAN economy. The following three structural problems

in ASEAN economy warrant attention: (1) difference in economic levels among member countries; (2)

get old before it gets rich; and (3) government debts and current account balance. By measuring

fundamentals-related indicator, we can clarify the differences among ASEAN countries(Figure 18).

Countries that failed to resolve their structural problems will end up in the middle-income trap.

Figure 18: Evaluation of fundamentals related to indicators of various countries

Note : Indicators related to the fundamentals of the various countries have been extracted and evaluated by

comparing with the average of the developed countries. The evaluation method has been set so that the

lower the inflation rate, the higher the evaluation point. The current account (Current Acc.) has been set

so that the higher the ratio of the surplus to GDP, the higher the evaluation point. The savings ratio has

been set so that the higher the gross national savings to the GDP, the higher the evaluation point.

Government, household, and corporate debts have all been set so that the lower their ratio to the GDP,

the higher their evaluation points. With regard to the Philippines and Vietnam, the evaluation points for

households and corporate debts have been recorded as zero because data does not exist in the BIS.

Source : “World Economic Outlook” (IMF), “BIS Statistics Warehouse” (BIS) and MRI staff calculation.

Inflation

Current Acc.

Savings

Government

Deficit

Government

Debt

Household

Debt

Corporate

Debt

-3

-1.5

0

1.5

3

PhilippinesInflation

Current Acc.

Savings

Government

Deficit

Government

Debt

Household

Debt

Corporate

Debt

-3

-1.5

0

1.5

3

Malaysia

Inflation

Current Acc.

Savings

Government

Deficit

Government

Debt

Household

Debt

Corporate

Debt

-3

-1.5

0

1.5

3

Indonesia

Inflation

Current Acc.

Savings

Government

Deficit

Government

Debt

Household

Debt

Corporate

Debt

-3

-1.5

0

1.5

3

Legend

Surplus

Low

High

LowLow

Low

Low

Inflation

Current Acc.

Savings

Government

Deficit

Government

Debt

Household

Debt

Corporate

Debt

-3

-1.5

0

1.5

3

VietnamInflation

Current Acc.

Savings

Government

Deficit

Government

Debt

Household

Debt

Corporate

Debt

-3

-1.5

0

1.5

3

Thailand

Ver 1.0

Medium and Long-term Global Economic Outlook

(FY2018-FY2030)

Inquiries on this report

Mitsubishi Research Institute (https://www.mri.co.jp/)

2-10-3 Nagata-cho, Chiyoda-ku, Tokyo 100-8141

Inquiries concerning contents

Yoko Takeda

Research Center for Policy and Economy

Tel: +81-3-6705-6087

Fax: +81-3-5157-2161

E-mail: [email protected]. jp

Inquiries about coverage

Yoshizawa, Shibuya, and Tsunoda

Public Relations Department

Tel: +81-3-6705-6000

Fax: +81-3-5157-2169

E-mail: [email protected]. jp

Authors:

Yoko Takeda, Junya Inose, Akihiro Morishige, Yasunari Tanaka, Go Taniguchi,

Hirotsugu Sakai, Masashi Santo, Tetsuya Yoshimura

Medium and Long-term Global Economic Outlook · differ depending on the trends. Furthermore, from...

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