Executive summary
This week, we look at three critical issues:
- China’s pension reform: Not bold enough. After years of discussions, China will raise the retirement age for men to 63 and for women to 55/58 (blue-collar/white-collar). Unfortunately, without any further increases, the old-age dependency ratio will be close to 80% in mid-century, and while the reform should add +0.5pp to China’s potential growth over 2025-2040, this will be insufficient to stave off China’s long-term growth slowdown. We expect potential growth at +3.9% over 2025-2040 (vs. +7.0% 2011-2020). In this context, raising the retirement age further and reducing incentives for early retirement are essential. But companies also need to adapt to the needs of an aging workforce to retain older workers for longer.
- The cost of new German border controls. The reintroduction of border controls in Germany is expected to cause significant shipping delays, adding about 20 minutes to typical Schengen crossings. The resulting higher shipping costs will likely lead to a -9.1% decline in German imports of goods and -7.8% of services, totaling EUR1.1bn annually. The educational and recreation sector would be hit the hardest (+3.5%), followed by foodstuffs (+2.6%) and trade services (+2.4%). Machinery and electrical equipment, along with chemicals and pharmaceuticals, are also projected to experience significant import reductions of EUR147mn and EUR142.1mn, respectively. Overall, this could exacerbate recession risks in an already fragile environment. Neighboring countries will not be spared due to strong supply-chain linkages: Imports from the Netherlands are likely to drop by -EUR0.2bn, while those from Poland would decline by -EUR0.1bn and those from France by -EUR92.4mn.
- Harris v. Trump: The climate story. US CO2 emissions have been steadily declining due to affordable natural gas, increased renewable energy and enhanced energy efficiency. While this trend is expected to continue regardless of who wins the next elections, the contrasting climate and energy agendas of candidates Kamala Harris and Donald Trump could have vastly different impacts on the economy and the green transition. Harris advocates for clean-energy investments through the Biden administration’s Inflation Reduction Act, while Trump favors fossil fuels and reducing support for renewables. If Trump wins, cuts to climate-research funding and global environmental contributions, as well as increased barriers to green trade, could slow progress and weaken international cooperation, leading to a "Fragmented World" transition. This could cost the global economy USD76.7trn by 2050 compared to a Paris-aligned transition that keeps global warming below 2°C.