Bill Cara

McKinsey asks, “What comes next for the global economy?”

June 27, 2023

I have become a big fan of McKinsey articles. This one (“What comes next for the global economy?“) emphasizes the importance of business leaders and policymakers in driving productivity growth and addressing regulatory obstacles to solve the mounting risks and challenges facing the global economy.

Issues such as elevated prices, increasing interest rates, and lackluster growth are highlighted. In the first quarter of 2023, the US economy expanded slower than expected, while China’s factory activity reached its lowest level since December 2022. Europe officially entered a recession due to surging energy prices and rising food costs, with Germany’s weakening economy being a significant factor.

The article emphasizes the significant growth of the global balance sheet, valued at over $500 trillion, compared to the world’s GDP of around $100 trillion. This growth in paper wealth has primarily been driven by rising prices rather than actual economic value creation.

McKinsey presents four possible economic scenarios for the future, focusing on inflation, interest rates, and growth over the next decade. The first scenario envisions a return to the past, resembling the last 30 years of low-interest rates and inflation. In contrast, the second scenario suggests persistently high inflation and interest rates accompanied by slower growth. The third scenario, a “balance sheet reset,” parallels Japan’s real estate crisis and involves sharp drops in asset prices and deleveraging. The fourth scenario, the most desirable outcome, is “productivity acceleration,” driven by technological advances and automation, which could double output with the same number of people and suppress inflation and interest rates. The most desirable scenario will be if productivity accelerates to match the growth of the global balance sheet. This outcome could be achieved through technological advancements, digitization, and task automation.

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