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

Transcription

1 Medium and Long-term Global Economic Outlook (FY218-FY23) 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 23, and the economic power will shift to Asia. Japan should implement the five imperatives to realize a society where challenges and reforms nurture affluence.

2 Megatrends in the Global Economy The rise of China's economy has become significant since the 28 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 25. 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 23. (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 Politics 政治 Economics 政治 Multi-poralization The State Capitalism Centralization and Decentralization Geopolitical Risks Expansion Shift of Economic Power to Asia Overtake of China-US/India-Japan Expansion of Young Islamic Economy Catch up of Developing Economies Social 政治 Technology 政治 Aging Society Economic Disparity and Social Divide Circular Economy through Sharing Integration of real and cyber society 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 Source: MRI. 2

3 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 23 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 25. Since various emerging powers will grow through 23, 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 3% towards 23. 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 23. Figure 2: Herfindahl-Hirschman index calculated based on the GDP shares of various countries (Index) 2,5 2, 1,5 Rapid economic growth of Japan Growth of Emerging Economies 1, 5 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. 3

4 ~2 2~5 5~1 1~2 2~5 5~1 1~ 1~2 2~3 3~4 4~5 5~6 6~ Trend 2: Shift of the Economic Power to Asia Asian economies will continue to make rapid growth. It is expected that the GDP share of Asian countries will rise from around 2% of the global GDP in 2 to nearly 4% in 23 (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 23, 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. Figure 3: Global GDP share of major countries (%) 6 Source : Maddison Historical Statistics, World Development Indicator (World Bank) and MRI staff estimate. 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 United States China India ASEAN Europe Asia (Total) Japan Figure 4: Distribution of income in countries according to income level with the figure set as 1 for the United States (left) and distribution of countries according to income share by the upper income class (right) (%) 's (N=191) 198's (N=157) (%) 's (N=37) 198's (N=28) Income Level (US=1) Income Share of TOP 1% 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 1. With regard to countries listed in the World Inequality Database, the income share by the upper 1% income class has been calculated in the figure on the right. Source : World Inequality Database, World Development Indicator (World Bank) and MRI staff calculation. 4

5 Trend 4: Circular Economy through Growth of Sharing Business 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 23: (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. 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 Operation & Maintenance (1) Progress in local Production reduces the import R&D/ Production Local production and sharing business shape the Circular Economy Intermediate Final Goods (2) Sharing business reduces demands for physical resource 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 5 billion globally by 23 (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 (Devices) Japan United States (Devices) (Devices) China 15 (Devices) 15 World Note : Number of consumer-use devices excluding those for business use. Source : Consumer Barometer (Google) and MRI staff estimate. 5

6 Global Economy in 23 based on the Five Trends The above five trends bring dramatic changes to the global economy in 23. 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 22 to the upper 1% level through 23. 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 22. After that, the growth rate is expected to fall to the upper % 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 22 to near the 4% level through 23. 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 23. 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 23. Figure 7: Comparison of the scale of nominal GDP of major emerging economies and developed countries 4 (trillion $) United States Japan China India ASEAN1 EU 1 (trillion $) Japan India ASEAN 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 23, and India s nominal GDP is based on the assumption that rupee appreciation will progress at a rate of about.5% per year, while that for Japan is based on the medium and long-term outlook prepared by MRI. Note 2 : ASEAN 1 refers to the following 1 countries: Indonesia, Thailand, Malaysia, the Philippines, Vietnam, Singapore, Myanmar, Laos, Cambodia, and Brunei. Source : World Economic Outlook (IMF) and MRI staff estimate. 6

7 Standard Scenario and Growth Scenario of the Japanese Economy The natural potential growth rate will be about % Amid shrinking and aging population, the potential growth rate of the Japanese economy will gradually decline to around % in 23. The improvement of the GDP gap leads Japanese economy out of deflation. However, with the continuing trend of the aging society, the 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 1-year-life. The growth scenario will push up real GDP by about 8 trillion Implementation of the five imperatives will likely increase the growth rate in 23 by about 1% from the natural growth rate of around %(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 7,. 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 8 trillion through realizing the growth scenario (Trillions of chained 211 yen) Reform scenario 639 trillion About 8 trillion 562 trillion Standard scenario (%) Reform scenario +1.4% About +1.2% +.2% Standard scenario Source: System of National Accounts (Cabinet Office) and MRI staff estimation. 7

8 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, 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 5 trillion in 23 which is roughly 15% of total household expenditure (Figure 9). Figure 9: Size of the potential consumer market for services in the future is 5 trillion Education and cultivation human resources Regional revitalization Automation and improvement of efficiency Energy Trillion 9 15 Healthcare Mobility Security and resilience 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 23. Source : The survey panel of MRI s Market Intelligence (mif). New investments are also necessary to achieve affluent society in the future. We estimate the required domestic investment amount by 23 is about 2 trillion yen (cumulative investment from 218 to 23) (Figure 1). 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 1: Cumulative total of about 2 trillion required for realizing the future society Healthcare 2-45 trillion Improvement of productivity in medical and long-term care services: 2-45 trillion Health-related market: 2-5 trillion Source: MRI. Mobility 15 trillion Self-driving car EV MaaS: 35 trillion Decrease of gasoline car: 2 trillion Digital technology 65-9 trillion New digital products(ex: robotic process automation, factory automation) to improve productivity: 65-9 trillion Energy trillion Renewable energy: 25 trillion Energy-saving: 4-6 trillion 8

9 Point 2: Taking Advantage of Global Demand The current trend of local production for local consumption and building demandoriented value chains is likely to further accelerate through 23. 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 214 and 216) to $3.4 trillion through 23 (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: of the size of the cross-border direct investment market 8% EU The market size of cross-border direct investment $1.6 trillion $3.4 trillion The average during (23) ( 214 and 216 ) United states CIS China 15% 7% Eastern Europe North Africa and Middle East 8% Note Sub-Saharan Africa Other Asian countries and Oceania (Including India, ASEAN and Australia) Inner circle:the result value during 214 and 216 Outer circle:the predicted value in 23 Percentage :The share of Japan in cross-border direct investment in each region Central and South America Note : The value forecast for 23 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 198. Source : Foreign Direct Investment (UNCTAD), World Economic Outlook (IMF) and MRI staff estimation. 9

10 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 22s 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-22s. 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 2% in Japan. This is two-thirds of the United States and one-half of the UK. In the Japanese labor market, about 8% of workers have remained in routine type tasks in 215 (Figure 12). Figure 12: International comparison of human resources portfolios (25-215) Note 1 : The two axes were defined as follows: routine nonroutine was set for the vertical axis, while manual cognitive was set for the horizontal axis, following earlier studies by Autor, Levy, and Murnane (23), etc. Note 2 : The numerical values in the figure indicate shares in 215. Source : O*net (US), Office for National Statistics (UK), Population and Housing Census (Japan) and MRI staff calculation. If workers do not shift to non-routine type tasks at the macro level, about 8% 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. 1

11 Point 4: Sustainable Local Economies By 23, 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 1-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 1-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 225. 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 4 billion yen; and (3) raising the consumption tax rate to 13%(Figure 13). Figure 13: Combination of choices to make primary balance in FY225 Growth Expenditure suppresion Revenue expansion Real GDP growth rate (FY ) Social security expenditure (FY ) Consumption tax rate (Untill FY225) PB deficit in FY225 Standard scenario.5% +\.9 trillion/year 1% 15.4 trillion The consumption tax rate.5% +\.9 trillion/year 16% to make PB profitable +6% increase (Reduced amount of PB deficit) The combination of three choices \15.4 trillion.9% +\.5 trillion/year 13% +.4% increase \.4 trillion/year decrease +3% increase Eliminated deficit (± trillion) (Reduced amount of PB deficit) \5. trillion \3.3 trillion \7.1 trillion Source: MRI. 11

12 United States Canada Sweden France Spain Denmark Germany United Kingdom Belgium Netherlands Japan Portugal Italy 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 14: Ratio of VC investment to GDP (%) Early stage Later stage Figure 15: Disparities of assets and income in the United States (%) The Great Dipression The share of the top 1% in national wealth The share of the top 1% in national income before taxes Note : The data is from 216. Source : Entrepreneurship at a Glance 217 (OECD). Source: World Wealth & Income Database. 12

13 Switzerland Sweden Netherlands United States United Kingdom Denmark Singapore Finland Germany Ireland Korea, Republic of Luxembourg Iceland Japan France Hong Kong (China) Israel Canada Austria Norway New Zealand China EU Australia Czech Republic Estonia Malta Belgium Spain Italy Cyprus Portugal Slovenia Latvia Slovakia United Arab Emirates Bulgaria Malaysia Poland Hungary Lithuania Croatia Romania Turkey Greece Russian Federation 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 % level after 22, 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 (The average of developed countries=1) Note : 217. 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. 13

14 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 postbubble 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) 13 (USA=1) Composite 13 (USA=1) Output 13 (USA=1) Input CHE DEU USA CHE KOR JPN DEU USA KOR DEU USA CHE JPN KOR 8 8 JPN 8 7 CHN 7 CHN 7 CHN 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. 14

15 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 73 million in 23, in line with the working-age population ratio reaching 67% by 23. 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 Indonesia Malaysia Philippines Inflation Inflation Inflation Corporate 1.5 Current Acc. Corporate 1.5 Current Acc. Corporate 1.5 Current Acc Household -3 Household -3 Household -3 Savings Savings Savings Deficit Thailand Inflation 3 Corporate 1.5 Current Acc. Vietnam Inflation 3 Corporate 1.5 Deficit Current Acc. Legend Inflation 3 Corporate 1.5 Low Low Deficit Current Acc. Surplus Household -3 Savings Deficit Household -3 Savings Deficit Household Low -3 Low High Savings Low Deficit 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., 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. 15

16 Ver 1. Medium and Long-term Global Economic Outlook (FY218-FY23) Inquiries on this report Mitsubishi Research Institute ( Nagata-cho, Chiyoda-ku, Tokyo Inquiries concerning contents Yoko Takeda Research Center for Policy and Economy Tel: Fax: Inquiries about coverage Yoshizawa, Shibuya, and Tsunoda Public Relations Department Tel: Fax: Authors: Yoko Takeda, Junya Inose, Akihiro Morishige, Yasunari Tanaka, Go Taniguchi, Hirotsugu Sakai, Masashi Santo, Tetsuya Yoshimura