Quarter-century crossroads

Somehow, the 21st century is now more than a quarter complete. Amazingly, we are already inhabiting the second quarter of the century – an era that will extend until the distant year of 2049.

Thinking over such long durations is valuable: a broad aperture is a better match for the average investor’s time horizon than the more frenetic year-to-year or even day-to-day analysis that usually prevails. Doing so helps to separate the wheat from the chaff: it is the macro themes that stick around for decades that arguably matter the most.

As a starting point, it is instructive to reflect on the key macro themes of the now-completed first quarter century. Even more so, if far more speculatively, it is useful to ponder the economic themes that could dominate the next quarter century.

The first quarter century – 2000 to 2024

The rise of China must surely figure centrally in the first quarter of this century. China was admitted to the World Trade Organization in 2001 and enjoyed a rocket-fuelled ride, taking over a large swath of global manufacturing and massively increasing its own standard of living along the way.

To a less prominent degree, the first quarter century also saw significant advancement across many emerging-market nations, to the point that these countries now generate over 60 percent of global economic output on a purchasing-power-parity basis (and around 40 percent on a market-exchange-rate basis).

Alongside this, globalization remained a powerful force for much of the quarter century, driving global growth, though it waned considerably over the final decade as Brexit and the introduction of U.S. tariffs marked a significant, late reversal.

It was a quarter century in which the tech sector dominated, with the internet blossoming and smartphones revolutionizing daily life.

Demographics were already souring at the beginning of the quarter century, but the ball really got rolling late in the first decade, and now a range of countries are experiencing outright shrinking populations.

Somewhat less glamorously, and with a number of shuddering speedbumps along the way, the Eurozone project went from its early stages – the European Central Bank was just a year old in 2000, and the physical euro was not introduced until 2002, expanding to 20 countries from 11, issuing common debt, devising bailout mechanisms, centralizing banking supervision – to now engaging in efforts to coordinate energy and military decision-making.

Households leveraged themselves significantly over the first part of the quarter century; at which point, the public sector broadly took over, borrowing extensively through the latter part of that stretch. The bottom line is that quite a lot of debt has accumulated.

There was a commodity supercycle, in significant part because of China’s rapid growth and ravenous appetite for raw materials.

Bond yields generally declined over the quarter century, except for a sharp upward tilt in the final few years.

The U.S. stock market performance over the quarter century – crucially defined in this case as Jan. 1, 2000 to Dec. 31, 2024 – was fairly pedestrian relative to earlier eras. If that seems surprisingly low, recall that it was a tale of two time periods, with a lost decade from 2000 to 2009 followed by pretty remarkable gains since then.

S&P 500 total annualized return

Key events that have since substantially faded

It is worth also reflecting on key forces and events that cast a long shadow over the quarter century but that have ceased to be material economic drivers.

• The dot-com bubble burst in the very early part of the quarter century, contributing to a mild economic downturn.
• The War on Terror dominated American foreign policy post-9/11 and into the 2010s, but the geopolitical and military focus has since shifted elsewhere.
• The U.S. experienced a housing bubble and then a housing crash, followed by a financial crisis that prompted the significant tightening of banking regulations (now seemingly on the cusp of being reversed). Economic growth was unusually slow in the years after the financial crisis as private-sector deleveraging took place.
• The European sovereign debt crisis of the early 2010s was a massive test for the European Union (EU), which managed to survive it. The countries most challenged at that time are today some of the fastest-growing economies within the EU.
• The pandemic significantly upset life and economic activity, with some lingering effects including the persistence of working from home, diminished downtowns and higher public debt.

The next quarter century – 2025 to 2049

Forecasting is easy – it’s the “getting it right” part that is hard. It must be emphasized that most of what comes next is speculative in nature.

Continuation of longstanding themes

It is arguably a failure of imagination that so many of the expected themes constitute the continuation of existing themes. But the reality is that many forces exert themselves over time periods even longer than a quarter century.

• China may no longer be growing at 10 percent per year, but it still appears capable of generating fairly remarkable economic growth and of taking an ever-more-central role in the world over the coming decades.
• As China becomes wealthier and other emerging-market economies nip at its heels, the rise of the global middle class should continue, with all the usual implications in terms of greater consumption, stronger demand for discretionary goods and services, and so on.
• The tech sector looks capable of remaining at the centre of economic growth and innovation, though AI applications could broaden productivity gains to a larger fraction of the economy.
• Demographic challenges are set to intensify, with fertility rates continuing to fall and longevity continuing to rise. Our demographic model forecasts that the global population peaks in 2066 – out of the timeframe of the next quarter century but not significantly so.

Birth rates have declined across regions, pressuring overall demographics

Fertility rates of select G20 countries (births per woman)

Relatively new themes that may persist

Now we turn to new themes that may have legs – and could remain relevant for years to come.

• The relatively recent pivot from a hegemonic world with the U.S. as the sole superpower to a multipolar world wherein multiple countries play leadership roles looks likely to be enduring, with China a fierce and formidable competitor for the U.S.
• The prior Western-led, rules-based global order appears to be transforming into a power-based order. Strong countries are less likely to heed international norms and more likely to push smaller countries around. Conflict is likely to increase, and military spending is certain to rise. Geopolitical stability declines.
• AI has now been a central theme for a few years and has shown every ability to remain a central theme – perhaps even the main economic theme – for years and perhaps decades to come.
• Climate change is not new, but its effects are starting to become more visible, more problematic and less easily reversed. Among many possible consequences, migration pressures could mount from the hottest parts of the world. The political will to combat this force is seemingly fading as other economic and political imperatives dominate.
• The recent pivot toward deglobalization may persist, if hopefully at a somewhat less frenetic pace than the last nine months, as cliques of countries form and nationalization trumps multilateralism.
• The bond market may remain in its new state of greater alertness after a decade-plus of drowsy indifference. In particular, fiscal excesses may attract greater scrutiny, leading to a relatively steep yield curve and bond yields that are not as low as during the 2010s.

Globalization has become deglobalization

Ratio of world merchandise exports to GDP growth

New themes

Finally, we contemplate fresh new themes that could prove highly significant over the next quarter century.

• U.S. exceptionalism is likely to diminish somewhat. While the U.S. economy will probably continue to grow faster than most of its developed-world peers, the growth advantage may not be as great as it has been in recent years. U.S. immigration is down, and questionable public policy decisions could undermine some fraction of the country’s long-term growth. Conversely, other countries, startled and awakened by recent events, are reprioritizing economic growth. Given American domestic political polarization, fiscal excesses, and more competitive posture toward both allies and rivals, the clout of the U.S. dollar and the Treasury market should decline somewhat over time.
• We budget for faster global productivity growth in the decades ahead, given a confluence of exciting and potentially revolutionary technologies, including AI applications in natural language processing, robotics and sensing (potentially combined to great effect in self-driving cars), health care innovations and beyond. It remains to be seen whether the demand for human labour will decline at the economy-wide level, but if so, there would be far-reaching consequences including structurally higher unemployment, more generous government income supports and likely a higher tax rate on capital.
• Oil demand is expected to peak around 2029–2034. That doesn’t mean that oil drilling will grind to a halt – the decline rate on existing wells is such that exploration will have to continue for the foreseeable future. It also doesn’t guarantee that oil prices will fall, as that depends on the sensitive interplay of supply decisions against projected demand. But it does mark a significant change and one of substantial relevance to several industries.
• Not that these countries are unimportant today, but India and several Southeast Asian nations including Indonesia appear to be on the cusp of really making waves in the global economy over the coming decades, given their large populations and rapid growth. Africa should also start to become more relevant, though its biggest impact may be saved for the latter half of the century.
• In financial markets, one might imagine the stock market generating more modest equity returns than over the past few decades, given limits to how much further valuations can rise and perhaps also limits to how substantially profit margins can rise from here. But rapid productivity growth should remain an important support and, in a best-case scenario, could outmuscle other drags.

About the author

Eric Lascelles is Managing Director & Chief Economist for RBC Global Asset Management Inc. (RBC GAM). He maintains the firm’s global economic forecast and advises its portfolio managers on key themes and risks. Eric is also a member of the RBC Investment Strategy Committee (RISC), which is responsible for RBC GAM’s global asset mix recommendations. In his two decades as an economist, Eric has also worked as a bank economist for another large financial institution, as a trading floor economist, and as a fixed income strategist.

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