Macroeconomics

Is China’s economy facing Japanification? As China’s economy sputters, investors are asking whether the country could repeat Japan’s experience in the 1990s. Goldman Sachs Research finds that even though there are some key similarities between the two situations, China’s “Japanification” is far from certain. While deteriorating demographics, a debt overhang, and an asset-bubble-burst were all important ingredients to Japan’s malaise at the turn of the century, a key contributor to its Japanification was a fundamental change in longer-term growth expectations, Goldman Sachs Research China Economist Hui Shan writes in the team’s report. She says growth expectations in China, which is also coping with worsening demographics, a debt overhang, and a deflating property market, are showing signs of a downward drift, but there are ways policymakers can avoid a Japanese-style slump. “The key to avoid such a negative feedback loop is to cut off the continued deterioration in longer-term growth expectations,” Shan says. She points out there are bright spots in the economy, including investment in electrical machinery in the manufacturing sector and an increase in making precession instruments and cars. Policymakers’ will have to manage the outlook for GDP growth as the world’s second-largest economy transitions from one of its important economic engines — property and infrastructure investment — to a new one based on upgraded manufacturing and self-reliance. “During this process, growth is expected to be soft before the new engine reaches a scale that is comparable to the old engine,” Shan says. Inflation will probably be muted because of the unfavorable demand-supply balance, and nominal interest rates will need to stay low to facilitate the deleveraging of the old economy. “These are mild symptoms of Japanification that will stay with China for at least a few years in our view,” she adds. How China compares to Japan in the mid-1990s By some measures, China’s situation looks even more dire than Japan’s did some 30 years ago, according to Goldman Sachs Research. For starters, China’s crude birth rate (the ratio between the number of live births in a year and the total mid-year population) has fallen further — it declined to 0.75% in 2022, considerably lower than Japan’s 0.99% rate in 1990 — and medical experts believe it may not have bottomed yet. Weakness in China’s housing sector also looks more pronounced. The urban residential property vacancy rate is around 20% in China, more than double the 9% rate that Japan endured in 1990, and housing prices are more stretched at 20 times household income in China, versus 11 times in Japan in 1990. Given that residential investment represents about twice the share of China’s GDP compared with Japan in 1990, “the direct impact from a housing slump to the real economy would be bigger in China than in Japan,” Shan says. That said, there are ameliorating circumstances that suggest China may be able to avoid a prolonged downturn. China’s property slump isn’t being accentuated by a stock market collapse, as was the case for Japan in early 1990, when plunging share prices severely damaged its banking system. China will likely continue to enjoy steady population growth in its urban centers, due to its still-low urbanization rate, even as its overall population declines. And, with a significantly lower GDP per capita, China’s economy also arguably has a higher potential growth rate than Japan in the 1990s, “which should make the deleveraging process less painful,” Shan says. In addition, healthy Chinese companies, unlike firms in Japan in the 1990s, aren’t reluctant to invest because their balance sheets are impaired, but rather because of regulatory tightening and policy unpredictability. Japanese banks were able to procrastinate in dealing with non-performing loans and provide forbearance lending to zombie companies. “The Chinese government does not face the same political costs that the Japanese government did, but its preference for commercial banks to absorb a large share of losses in property and local government implicit debt may nonetheless constrain their credit creation ability,” Shan says. The real reason for Japan’s economic stagnation Then there’s the question of just how much of Japan’s woes in the 1990s were tied directly to demographics. Businesses saw demographics exerting downward pressure on long-term growth expectations and pulled back on spending and increased saving, creating a negative feedback loop. In fact, most of the decline in Japan’s potential growth rate in the 1990s can be explained by the falling contribution of investment on worsening growth expectations, Shan says. By contrast, labor’s contribution played a relatively small role. “Deteriorating long-term growth expectations rather than deteriorating demographics were at the core of ‘Japanification,’” she says.   The latest data coming out of China suggests expectations have weakened materially over the past 18 months. Private investment, for example, stopped increasing after early 2022 and contracted outright in 2023. Likewise, consumer confidence plummeted during the Shanghai lockdown in April 2022 and has stayed depressed since. “The lack of coordinated and forceful policy responses has led many forecasters to downgrade their medium-term growth outlook for China,” Shan says. There are steps China can take to counter that pessimism, according to Goldman Sachs Research. The government could emphasize the importance of economic development, accelerate the restructuring of troubled property developers and local government financing vehicles, and strengthen social safety nets to encourage long run household consumption. They also caution that commercial banks shouldn’t be made to shoulder most of the loan losses during property deleveraging to protect their ability to extend new credit, among other steps to provide greater policy certainty. “Policy predictability and coordination are important for investment demand from the private sector,” Shan says. “The Chinese economy doesn’t have to follow Japan’s path in the 1990s.”

India’s affluent population is likely to hit 100 million by 2027 India’s real GDP is expected to grow at more than 6% every year between 2023 and 2028, according to Goldman Sachs Research. In tandem, the wealth of affluent Indians is rapidly growing as well. By 2027, according to a report titled “The rise of ‘Affluent India’” by Goldman Sachs Research, this cohort of affluent consumers will increase from around 60 million in 2023 to 100 million people by 2027. We spoke to Arnab Mitra, an analyst who leads research coverage of Indian consumer brands, about his team’s research, their calculations and forecasts, and the characteristics of affluent Indians. What kind of data did you use to triangulate your definition of “affluent” Indians? We looked at the number of people who take a flight at least once a year; the number of people who order from food delivery services at least once a month; the number of people who file income taxes on sums of more than 1 million rupees ($12,046); the number of people who have credit cards and postpaid mobile connections. Whichever way we looked, it seemed that the unique number of people who use discretionary products and services is somewhere in the region of 50 or 60 million. Then we looked at the income pyramid, which tells us what the top 60 million people earn. It seems to be around an annual $10,000 per person. And how has that changed over time? From 2019 to 2023, the cohort has shown a compounded annual growth rate of about 12-13%. That is corroborated by the sectors I mentioned. So the number of credit cards has grown by about 14-15%, for example. The tax filings we looked at, for more than 1 million rupees — they were growing at about 19%   One thing we see in your data is how the volume of household financial assets invested in shares has grown conspicuously since 2016. How else do we see the growth of this cohort in the dynamics of the Indian stock markets? It’s quite clear that companies that address this cohort exclusively, or largely, have been growing much faster than companies that address broad-based consumption. We compared companies in the same sector that cater to upper-income consumers versus a broader group. So in cars, for instance, we compared SUVs to other kinds of cars. Or we compared premium liquor and spirits brands to more mass-market brands. We also looked at hospital or watch companies that exclusively target affluent consumers. All these stocks—they’ve done significantly better in terms of returns.   How do gold and stock holdings contribute to the wealth of these affluent Indians? We don’t always have clear data on gold ownership, although there is one government survey showing that 90% of gold is owned by people in the top 10% of India’s earners. With shares — before the pandemic, there were 41 million Indians with online stock trading accounts, and these people would have made a lot of money since then. Again, this syncs with the 60 million figure we postulate for affluent Indians. Now, of course, the number of Indians with such trading accounts has risen to more than 100 million.   Can we say anything about the non-affluent Indians — the broader population, and how they’ve fared in this same period? Essentially, the drivers of consumption are different. Inflation impacts the non-affluent cohort more, because they have fewer savings. Even before the pandemic, rural growth in fast-moving consumer goods had slowed down. That possibly has to do with the fact that agricultural output prices have not increased much over the last five years. And there have been disruptions such as demonetization and the introduction of a new, nationwide goods and services tax, followed by the pandemic, which affected a higher number of small businesses and people in low-income segments. How will this cohort of affluent Indians grow? After having seen these growth numbers of 12-13%, we investigated whether any of the factors driving upper-income growth are changing. The wealth effect is, if anything, strengthening, because it kicks in with a little bit of a lag — when your stock holdings rise in value the first year, you don’t feel as good as when they rise for the third consecutive year. That’s when you start spending because you feel it’s a little more permanent. So we extrapolated the growth rate between 2019 and 2023, which is around 12-13%, into the next four years, expecting a cohort of 100 million by 2027. And if the wealth effect is strong, it could be even more.

How to help boost the UK economy with a boom in high-productivity businesses The UK’s 5.5 million small- and medium-size enterprises (SMEs) could be an answer to revving up the UK economy and reversing more than a decade of stalled productivity. A survey of UK small business owners who participated in the Goldman Sachs 10,000 Small Businesses (10KSB) program helps to lay out their views and asks on government policies, such as upskilling the workforce, which could improve worker efficiency and unlock £106 billion in private sector revenue and 88,000 new jobs. The survey is at the heart of Generation Growth: The Small Business Manifesto, which was produced by Goldman Sachs 10,000 Small Businesses in partnership with the Aston Centre for Growth; Saïd Business School, University of Oxford; and Seven Hills Communications. The survey of more than 550 alumni of the 10KSB program finds that these companies are, overall, optimistic about doing business in the UK and have embraced advanced technology like generative artificial intelligence surprisingly quickly. But these business owners also see areas where government support is greatly needed to help them be more efficient. The UK’s growth in productivity, which is critical for boosting wages and prosperity, has long lagged behind its peers. Since 2007, the increase in average annual productivity in the UK has languished at just 0.2%, compared to an average of 3.6% in the three decades following World War II. Britain’s SMEs can help reverse that trend. Right now, only about 36,000 of them qualify as “Productivity Heroes” — SMEs that are established (more than three years old) and are growing revenues faster than they are expanding their workforces, according to the report. During an average 12-month period, this group of businesses increased revenues by 196% and headcount by 29%. The country has had bursts of new, high-productivity companies in the past, such as the years just before the financial crisis or in the decades following World War II. Matching that performance again could have a profound impact on the UK economy, potentially increasing the number of “Productivity Heroes” by 22,000, helping to generate an additional £106 billion in revenues and 88,000 jobs. “Small businesses are the engines of UK growth and have the power to transform communities,” Charlotte Keenan, head of the Office of Corporate Engagement’s international responsibilities, writes in the manifesto. She points out that small businesses make up 99% of all private sector enterprises in the UK, 61% of employees, and 53% of sales turnover. Many alumni of 10KSB UK, an education and business support program, are already “Productivity Heroes” or are close to being one. That makes this community a rich resource of ideas to improve productivity — 71% of 10KSB UK alumni are increasing their sales turnover, and 73% are increasing their headcount. What can be done to improve productivity in the UK? The 10KSB UK respondents in the survey, overall, have a positive outlook: Some 68% say the UK is a good place to run a small business. 90% or more expect to grow revenue and headcount in the next three years. Even so, more than half (55%)  also say they are unable to find the talent they need, and only 12% believe the education system is equipping young people for the future of work. A large majority – 89% – believe enterprise skills should be embedded within the core secondary school curriculum. Surprisingly, only 5% say they would prioritize coding, natural sciences, and engineering skills; 19% say they are looking for talent with basic IT skills (like proficiency in Microsoft Office) and accounting and presentation skills. Small business owners also want to see the government work more closely with small businesses to support international recruitment and explore the potential for mutually beneficial visa waivers. They also believe small businesses should be a voice at the table when policymakers are developing any potential changes to employee rights. Improving SMEs’ access to financing The second priority of survey respondents for the next government is on improving small businesses’ access to financing. 58% say they would consider taking their companies public, and 44% of those say the UK is an attractive market for an IPO. But more than a third of those interviewed (37%) say they were unable to access the capital they need to grow their businesses. Small business owners’ recommendations include:   Increasing the range of government-backed and government-supported financing options specifically targeted at small businesses, such as specialized loan schemes and encouraging UK pensions to back SMEs Including a commitment to entrepreneurship as an area for spending in any implementation of a UK sovereign wealth fund Building a national campaign to increase SME leaders’ awareness of the existing financing options that they need to grow, especially for women and ethnic minority business owners who are currently underserved Other ways the government can support SMEs in the UK Many respondents (41%) say late payments from other companies have had an impact on their growth, and a majority (89%) say they would support tougher legislation for big businesses on late payments. When it comes to taxes, more than 90% support a discount on businesses rates for meaningful property improvement, and many support the idea of differential business rates depending on business sector (78%) and productivity potential (72%). When it comes to climate change, small business owners ask the government to view small businesses as key partners to help the UK meet its net-zero objectives. They say the government should investigate new ways of helping SMEs withstand changes in the energy market. And three quarters of respondents think the next government should establish and invest in a new publicly owned power generation company. In terms of AI, many firms are already familiar with this technology. 80% are either already specifically using generative AI tools such as Chat GPT or plan to start doing so in the next 12 months. Their policy recommendations include support to take advantage of the opportunity AI represents through education and financial incentives, and clear guidance on AI specifically aimed at small

Tariffs’ impact on the US dollar Download Video Transcriptdownload What could tariffs mean for the US dollar? Karen Fishman, senior economist with Goldman Sachs Research, separates the signal from the noise. 

Chinese measures to raise birth rates are boosting dairy stocks Recent policy announcements in China highlight new government efforts to raise birth rates. For investors, this suggests an improving outlook among dairy and infant formula companies that have sales in China, according to Goldman Sachs Research. It also creates a positive storyline for companies outside Asia that make ingredients for infant nutrition. The policy developments include a March 13 announcement by leaders in Hohhot, Inner Mongolia’s capital, of child-raising subsidies. The city will offer a one-time payment of RMB 10,000 ($1,383) to help support a family’s first child; provide RMB 10,000 per year up to age five for a second child, for a total of RMB 50,000; and will grant a subsidy of RMB 10,000 per year for 10 years for a third child or additional children. The announced subsidies in Hohhot also included a plan to provide milk to parents for one year after a child is born, through coupons for dairy products worth RMB 3,000. “Hohhot’s initiatives resonate with the government’s recent policy direction,” Goldman Sachs Research analyst Leaf Liu and her colleagues write in a report. How is China attempting to increase birth rates? A few days after Hohhot’s announcement, China’s government unveiled a special action plan that signaled the potential for more childcare subsidies nationwide. The plan reinforced policies to promote consumption that emerged from the annual plenary sessions of the National People’s Congress and the Chinese People’s Political Consultative Conference in Beijing earlier in the month. The subsidies for parents in Hohhot are high compared with similar programs announced in recent years in other Chinese cities, Andrew Tilton, chief Asia Pacific economist and head of Emerging Markets Economic Research, writes in a separate report. The macroeconomic impact will be limited if Hohhot is the only place offering subsidies at that level. Still, Goldman Sachs economists estimate that these types of supports, if implemented nationwide, could add between 0.1 and 0.3 percentage point to annual GDP. Shares of dairy companies that can benefit from these measures in China have risen: A basket of stocks that includes large makers of liquid milk, milk powder, and infant formula rallied more than 7% in just a few days. China’s fertility policy could boost stocks outside China Companies in Europe may also benefit from China’s efforts to boosts birth rates and provide greater support for families with young children, Georgina Fraser, head of the European Chemicals team, writes in a separate report. Policies to increase domestic consumption and enhance citizens’ quality of life could drive more demand for premium and higher-value dairy products. Investors may find opportunities in biotechnology companies that have engineered human milk oligosaccharides (HMOs), a type of carbohydrate that occurs naturally in human breast milk and promotes immune health and gut function. “The commercialization of HMOs is on the back of more favorable regulation,” Fraser writes. By 2030, there may be HMOs in 50% of the infant formula produced worldwide, up from just 5% today, she says in her team’s report. Some European companies make HMOs. Fraser writes that the market for these products could broaden across age groups. “HMOs are increasingly being recognized for supporting immune and gut health for a broader demographic,” Fraser writes. The outlook for demographics in China Births have been falling in China for years, but they rose in 2024. There’s further room for birth rates to rebound, Liu writes. Mothers aged 20 to 24 are estimated to be having children at half the pace they were before the pandemic, and mothers in the 30 to 44 age range have a birth rate notably below levels seen in Japan and South Korea for that age range. As a result, there’s scope for a recovery in birth rates. If policy support for having more children turns out to be significant nationwide, “our population model points to a potential uptick in new births” over the next decade, Liu writes.

Defense spending to boost German and European GDP growth The economic growth outlook is improving in Germany — and in Europe as a whole — amid a fiscal plan that emerged after Germany’s federal election and the prospect of higher military spending across the region, according to Goldman Sachs Research. German voters in late February put Friedrich Merz in line to become Chancellor and gave his Christian Democratic Union (CDU) and the Social Democratic Party (SPD) a slim legislative majority that should allow for a two-party coalition. This outcome makes higher government spending more likely. The coalition partners have announced a fiscal plan to exempt substantial defense outlays from Germany’s so-called debt brake and to create a €500 billion ($546 billion) off-budget infrastructure and climate protection fund, among other steps.  In light of these developments, Goldman Sachs Research Chief European Economist Sven Jari Stehn and his team increased their forecast for real GDP growth in Germany this year to 0.2% from flat. They also raised their 2026 forecast by 0.5 percentage point to 1.5% and increased the estimate for 2027 by 0.6 percentage point to 2%. “Growth could be higher with quicker implementation,” Stehn and his colleagues write in a report. “In practice, we think the implementation will be more gradual given capacity constraints and well-known challenges with stepping up public investment.”  Why the German economy is improving The researchers examine the potential impact of three key elements in the fiscal plan. Defense spending in excess of 1% of GDP would become exempt from the debt brake, Germany’s constitutional limit on structural deficits. The team sees military spending ramping up to 3% of GDP by 2027 and reaching 3.5% after that. The off-budget infrastructure and climate protection fund, designed to last 12 years, would boost spending gradually, raising expenditures by €40 billion above our economists’ pre-election baseline in 2027. A third feature of the fiscal plan increases the permissible structural deficit German states can run. This and the freed-up space in the federal budget may be partially used for tax cuts. The lower house of parliament (Bundestag) passed the package this week and our researchers expect the fiscal package to also pass the upper house (Bundesrat) later this week, before newly elected Bundestag members are seated in late March. Business leaders and investors have been pushing for a loosening of Germany’s debt rules and a boost in government spending, as the economy has been sluggish for several years, a growth laggard among the large European nations. The outlook for euro area GDP growth The researchers also raised their forecasts for the euro zone as a whole. They added 0.1 percentage point to this year’s growth estimate, bringing it to 0.8% for the region. They increased the 2026 forecast by 0.2 percentage point to 1.3%, and boosted the 2027 numbers by 0.3 percentage point to 1.6%. “One reason is that we expect stronger growth in Germany to spill over into neighboring countries,” Stehn writes of the forecast change. “Another reason is that we now expect the rest of the euro area to step up military spending somewhat more quickly in response to the German announcement.” The team sees France boosting defense spending to 2.9% of GDP by 2027, Italy reaching 2.8% of GDP, and Spain boosting outlays to 2.7% of GDP. This is a 0.3 percentage point increase from the researchers’ previous estimates. Some of the increases in defense outlays could be offset by spending cuts elsewhere or tax increases, the researchers note, as these countries bump up against their own fiscal limits, resulting in a smaller economic boost.   “We see risks in both directions around our new forecast” for the euro zone, Stehn writes. A steeper increase in public spending, especially in Germany, could create faster-than-forecast growth in 2026 and 2027. On the other hand, the researchers acknowledge the ongoing risk that tariffs and trade tensions with the US might have a greater-than-expected impact. The researchers have as a baseline a 0.5 percentage point drag on growth from targeted tariffs and trade policy uncertainty in 2025. “An across-the-board tariff could imply an additional hit to growth of 0.5% this year,” they write. The prospect of increased government spending across the euro zone decreases pressure on the European Central Bank to cut rates below the neutral policy rate, the researchers find. They now expect that the central bankers will be satisfied by cutting rates to a terminal rate of 2%, with 0.25% cuts expected in April and June (the policy rate is 2.5% now), rather than lowering it further in July. 

Why the US economy may grow more slowly than expected The US economy may expand more slowly than previously forecast as tariffs on imports rise and the Trump administration signals that it may tolerate slower growth in order to implement its trade policies, according to Goldman Sachs Research. Our economists reduced their prediction for US GDP expansion to 1.7% in the fourth quarter of 2025 (year over year) from their earlier estimate of 2.2%. Goldman Sachs Research’s forecast for the world’s largest economy is, for the first time in more than two years, lower than the consensus estimate of economists surveyed by Bloomberg.  “Our trade policy assumptions have become considerably more adverse and the administration is managing expectations towards tariff-induced near-term economic weakness,” Goldman Sachs Research Chief Economist Jan Hatzius writes in the team’s report. The average US tariff rate is expected to rise by 10 percentage points this year. That’s twice Goldman Sachs Research’s previous forecast and about five times the increase seen in the first Trump administration. While some import taxes have been softened, our economists expect levies in the coming months on critical goods, global autos, and a “reciprocal” tariff. Reciprocal tariffs and the administration’s view of Europe’s 20% value added tax (VAT) are particularly important because the US considers the tax a tariff (even though Europe imposes it equally on imported and domestically produced goods). If applied mechanically, a reciprocal tariff that includes the effect of VAT could raise the average US tariff rate by 10 percentage points or more. Tariff carveouts will probably lower this number, but if the exemptions are less widespread than Goldman Sachs Research expects, the average tariff rate could rise as much as 15 percentage points. What are the economic effects of tariffs? Tariffs are likely to weigh on US economic growth via three main channels, according to Goldman Sachs Research. They raise consumer prices — and thereby cut real income — by an estimated 0.1% per 1 percentage point increase in the average US tariff rate. (In theory, the drag could diminish if the tariff revenue is recycled into additional tax cuts, but this revenue will not be scored in the ongoing budget negotiations if it results from executive as opposed to congressional action.) Tariffs tend to tighten financial conditions, although the impact in this cycle looks smaller than in the 2018-2019 trade war when scaled by the size of the tariff hikes. Trade policy uncertainty leads businesses to delay investment. All told, the team’s new baseline implies that tariffs will subtract an estimated 0.8 percentage point from GDP growth over the next year, with only 0.1-0.2 percentage point of this drag offset by the (relatively slow-moving) boost from tax cuts and regulatory easing. Will tariffs lead to higher inflation? Goldman Sachs Research now expects core PCE inflation to reaccelerate to 3% later this year, up nearly half a percentage point from their prior forecast. In theory, a tariff hike raises the price level permanently but only raises the inflation rate temporarily. In practice, this hinges on the assumption that inflation expectations remain well-anchored, which looks a bit more tenuous following the pickup in inflation-expectations measures from the University of Michigan and the Conference Board. Given their downgrade to the forecast for US GDP growth, our economists still expect the Federal Reserve to make two 25-basis-point cuts to the fed funds rate this year (June and December). Goldman Sachs Research’s near-term view is that the Federal Open Market Committee will want to stay on the sidelines and make as little news as possible until the policy outlook has become clearer.

Carbonomics: Tariffs, deglobalization and the cost of decarbonization Goldman Sachs Research has updated its Carbonomics cost curve which considers over 100 different applications for decarbonization tech across key emitting sectors, reflecting technological innovation and a growing push for local supply chains and tariffs. CarbonomicsTariffs, deglobalization and the cost of decarbonization

How much will rising defense spending boost Europe’s economy? March 6, 2025  Defense spending by European Union member states is set to increase significantly in the next two years. The shift will have a positive — but limited — impact on GDP growth, Goldman Sachs Research economists Niklas Garnadt and Filippo Taddei write in a report. The team’s baseline assumption is that the EU will gradually increase its annual defense spending by around €80 billion ($84 billion) by 2027 — equivalent to roughly 0.5% of GDP, according to the report dated February 27. Defense expenditures in the euro area accounted for 1.8% of GDP in 2024 and Goldman Sachs Research expects them to rise to 2.4% by 2027.  The incoming German government recently said it intends to exempt defense spending from budget control measures and to allot €500 billion to an infrastructure fund. If implemented, the policies could result in faster-than-expected GDP growth from Europe’s largest economy. The economic impact of defense spending depends on the type of expenditure and whether it is imported or produced locally. Goldman Sachs Research estimates that additional spending on defense will have a fiscal multiplier of 0.5 over two years. That means every €100 spent on defense would boost GDP by around €50. The forecast is based on the assumption that imports of military supplies gradually decrease (and are substituted with domestic products) and that the higher spending initially focuses on equipment and infrastructure. What is the outlook for European defense spending? Spending on equipment has recently increased more than other areas of defense, reaching 33% of spending by European members of NATO last year, up from 15% in 2014. Europe bought a substantial amount of military equipment from non-EU suppliers immediately after Ukraine was invaded by Russia. However, a large portion of European defense supplies has historically been purchased from domestic companies, particularly in larger EU member states. The average domestic share of sourcing was around 90% in France, 80% in Germany, and 70% in Italy between 2005 and 2022. Europe’s share of global arms production declined between 2008-2016, although it has since started to pick up again. EU manufacturers have joined the global surge in arms production and are now poised to expand at a faster rate than their US counterparts, according to market pricing. As defense spending increases, there will be growing opportunity for equipment to be harmonized (made interoperable across the continent), for research and development to scale up, and for efficiency to improve. Such changes would increase the economic impact of military spending, and it would probably result in a higher fiscal multiplier after three years. How Europe could fund higher defense spending To meet a defense-spending target of 2.5% of GDP, the euro area needs to increase expenditures by an additional 0.6% of GDP annually, Taddei writes in a separate research report dated March 2. European leaders are discussing a common strategy for increasing defense spending, which could involve issuing more debt at the national or EU level, or setting up new lending facilities from European institutions. Issuing more national debt could be challenging given the new European fiscal framework, which requires countries to contain their ratio of debt to GDP. European rules allow a temporary exception in the case of “major shocks to the EU,” Taddei writes, known as the “escape clause.” EU President Ursula Von der Leyen proposed this option at the Munich Security Conference in February. Making this exception permanent for future defense spending needs (known as a “golden rule”) would require the approval of the EU Council and the EU Parliament. Taddei writes that the EU president’s proposal has the advantage of being relatively quick. But he adds that “introducing a ‘golden rule’ would leave national defense spending exposed to sovereign market stress and reduce the likelihood of coordinated and harmonized military spending within the EU.” How Europe could leverage supranational debt Alternatively, the EU could turn to existing lending programs that are available for European governments — either the European Stability Mechanism (ESM) or the European Investment Bank (EIB). “The EIB has struggled to identify projects worth funding in line with the European priorities, and the industrial reconversion needed to scale up defence spending in Europe would likely provide an ideal target,” Taddei writes. These options have limitations however. Only euro area members would be eligible for ESM lending, for example, and the ESM would only temporarily shift issuance from domestic to supranational debt. EU debt, meanwhile, would provide stable funding. This could come in the form of repurposing an existing Covid pandemic borrowing program (called NGEU), or as a separate program that is dedicated to defense borrowing. The latter is the only option to secure low rates for long-run funding. “However, it is also the option with the most cumbersome approval process,” Taddei writes. The team expects that setting up a new funding facility would take about a year from design to implementation. “We continue to expect the EU to use national debt, NGEU, and a new funding facility, but in that sequence,” Taddei writes. He adds that national debt, combined with the repurposing of spare NGEU financial capacity, could fund military spending until 2026.

How global stock market rankings are forecast to change   The US has had the world’s largest economy for more than a century — a title it’s expected to relinquish in the coming decades. But even as US GDP is forecast to be surpassed in the years ahead, the country is projected to remain world leading when it comes to wealth and the size of its stock market, according to Goldman Sachs Research’s report “The Path to 2075.” Demographic projections and long-term drivers of productivity can help us glimpse how the global economy may look 50 years in the future. In fact, these longer-term forecasts are, in some ways, easier than shorter estimates over a year or two, which can be derailed by booms, recessions, and other surprises. That’s because some of the key variables underpinning long-term GDP growth are slower to change, while the shorter-term volatility of the business cycle tends to average out over time,  say Kevin Daly, co-head of Central & Eastern Europe, Middle East, and Africa Economics in Global Macro Research, and economist Tadas Gedminas. “Over the very long term, the things that tend to drive the size of economies are things like population growth and long-term productivity growth, which tend to be slower-moving and less variable,” Daly says.  The relative importance of capital markets in emerging economies is nevertheless projected to grow, from around one-quarter of total global market cap today to more than half by 2075. The research demonstrates that while rich, developed countries will remain critical in the decades that come, it won’t be possible to capture long-term, worldwide growth trends without exposure to emerging economies and their financial markets.