World energy demand and economic outlook

Overview

In the IEO2011 Reference case, world energy consumption increases by 53 percent, from 505 quadrillion Btu in 2008 to 770 quadrillion Btu in 2035 (Table 1). In the near term, the effects of the global recession of 2008-2009 curtailed world energy consumption.⁸ As nations recover from the downturn, however, world energy demand rebounds in the Reference case and increases strongly as a result of robust economic growth and expanding populations in the world's developing countries. OECD member countries are, for the most part, more advanced energy consumers.⁹ Energy demand in the OECD economies grows slowly over the projection period, at an average annual rate of 0.6 percent, whereas energy consumption in the non-OECD emerging economies expands by an average of 2.3 percent per year.

figure data

The global recovery from the 2008-2009 worldwide economic recession continues to advance, but the recovery remains uneven. In advanced economies, recovery is slow in comparison with recoveries from past recessions. Unemployment still is high among the advanced economies, and real estate markets and household income growth remain weak. Concerns about fiscal sustainability and financial turbulence means that advanced economies may not achieve the higher growth seen in past recoveries. In many emerging economies, growth remains high, in part driven by strong capital inflows and high commodity prices. Inflation pressures remain a concern, along with the need to rebalance external trade in key emerging economies.

figure data

The pace of economic recovery varies among the advanced, OECD nations. While the recession in the United States has officially ended¹⁰, recovery has been weaker than recoveries from past recessions. Europe's economic recovery has lagged even more. Japan's recovery had been sluggish before the devastating earthquake of March 11, 2011, and now the timing of economic recovery is more uncertain. In contrast to the OECD nations, developing non-OECD Asian economies have led the global recovery. The IEO2011 Reference case assumes that, by 2015, most nations of the world will have resumed their expected rates of long-term growth before the recession. World GDP rises by an average of 3.4 percent per year from 2008 to 2035 in the Reference case, with non-OECD economies averaging 4.6 percent per year and OECD economies 2.1 percent per year. Future energy consumption will be driven by non-OECD demand. Whereas energy use in non-OECD nations was 7 percent greater than that in OECD nations in 2008, non-OECD economies consume 38 percent more energy than OECD economies in 2020 in the IEO2011 Reference case and 67 percent more in 2035 (Figure 12).

figure data

Two nations that were among the least affected by the worldwide recession are China and India. They continue to lead world economic growth and energy demand growth in the Reference case. Since 1990, energy consumption in both countries as a share of total world energy use has increased significantly, and together they accounted for about 10 percent of total world energy consumption in 1990 and 21 percent in 2008. Although energy demand faltered in many parts of the world during the recession, robust growth continued in China and India, whose economies expanded by 12.4 percent and 6.9 percent, respectively, in 2009. U.S. energy consumption declined by 5.3 percent in 2009, and energy use in China is estimated to have surpassed that of the United States for the first time. In the IEO2011 Reference case, strong economic growth continues in both China and India, and their combined energy use more than doubles, accounting for 31 percent of total world energy consumption in 2035. In 2035, China's energy demand is 68 percent higher than U.S. energy demand (Figure 13).

Energy use in non-OECD Asia (led by China and India) shows the most robust growth of all the non-OECD regions, rising by 117 percent from 2008 to 2035 (Figure 14). However, strong growth in energy use also is projected for much of the rest of the non-OECD regions. With fast-paced growth in population and access to ample domestic resources, energy demand in the Middle East increases by 77 percent over the projection period. Energy consumption increases by 72 percent in Central and South America and by 67 percent in Africa. The slowest projected growth among non-OECD regions is for non-OECD Europe and Eurasia, which includes Russia and the other former Soviet Republics. Growth in energy use for the region totals 16 percent from 2008 to 2035, as its population declines and substantial gains in energy efficiency are achieved through the replacement of inefficient Soviet-era capital equipment.

Outlook for world energy consumption by source

figure data

The use of all energy sources increases over the time horizon of the IEO2011 Reference case (Figure 15). Given expectations that world oil prices will remain relatively high through most of the projection period, petroleum and other liquid fuels¹¹ are the world's slowest-growing source of energy. Liquids consumption increases at an average annual rate of 1.0 percent from 2008 to 2035, whereas total energy demand increases by 1.6 percent per year. Renewables are the fastest-growing source of world energy, with consumption increasing by 2.8 percent per year. Relatively high projected oil prices, as well as concern about the environmental impacts of fossil fuel use and strong government incentives for increasing the use of renewable energy in many countries around the world, improve the prospects for renewable energy sources worldwide in the outlook.

figure data

Although liquid fuels are expected to remain the largest source of energy, their share of world marketed energy consumption declines from 34 percent in 2008 to 29 percent in 2035. On a worldwide basis, liquids consumption increases only in the industrial and transportation sectors while declining in the buildings and electric power sectors. The decrease in liquid fuel use in the residential, commercial, and power sectors is a result of steadily rising world oil prices, which lead to switching to alternative fuels where possible. In contrast, the use of liquids in the transportation sector continues to increase despite rising prices, given the expectation that liquids will continue to dominate transportation markets absent significant technological advances. World liquids consumption for transportation grows by 1.4 percent per year from 2008 to 2035 and accounts for 82 percent of the total projected increment in liquid fuel use.

figure data

In the IEO2011 Reference case, the world's total natural gas consumption increases by 1.6 percent per year on average, from 111 trillion cubic feet in 2008 to 169 trillion cubic feet in 2035. Increasing supplies of unconventional natural gas, particularly in North America but elsewhere as well, help keep global markets well supplied. As a result, natural gas prices remain more competitive than oil prices, supporting the growth in projected worldwide gas consumption. In the projection period, the most rapid expansion of natural gas use is for electric power generation and industrial uses (Figure 16). Worldwide natural gas used for power generation increases by 2.0 percent per year from 2008 to 2035, and consumption in the industrial sector increases by 1.7 percent per year. These two sectors alone account for 87 percent of the net increase in global natural gas use over the projection period.

figure data

Throughout the projection, coal continues to be an important source of fuel, especially in non-OECD Asia, where the combination of fast-paced economic growth and large domestic reserves supports growth in coal demand. World coal consumption increases by an average 1.5 percent per year on average from 2008 to 2035, while coal use in non-OECD Asia increases by 2.3 percent per year. World coal consumption increased by a total of 30 percent from 2003 and 2008, largely because of China's fast-growing energy demand. In China alone, coal consumption increased by 71 percent over the 5-year period. Although the global recession had a negative impact on coal use in almost every other part of the world in 2009, coal consumption continued to increase in China. In the absence of policies or legislation that would limit the growth of coal use, China and, to a lesser extent, India and the other nations of non-OECD Asia consume coal in place of more expensive fuels in the outlook. In the IEO2011 Reference case, China alone accounts for 76 percent of the net increase in world coal consumption, and India and the rest of non-OECD Asia account for 19 percent of the world increase.

figure data

Electricity is the world's fastest-growing form of end-use energy consumption in the Reference case, as it has been for the past several decades. Net electricity generation worldwide rises by 2.3 percent per year on average from 2008 to 2035, while total world energy demand grows by 1.6 percent per year. The strongest growth in electricity generation is projected for non-OECD countries. Non-OECD electricity generation increases by an average annual rate of 3.3 percent in the Reference case, as rising standards of living increase demand for home appliances and electronic devices, as well as the expansion of commercial services, including hospitals, office buildings, and shopping malls. In the OECD nations, where infrastructures are more mature and population growth is relatively slow or declining, the growth in power generation is much slower, averaging 1.2 percent per year from 2008 to 2035.

Coal provides the largest share of world electricity generation, although its share declines over the projection period. From 40 percent of total generation in 2008, coal's share falls to 37 percent in 2035 (Figure 17). The liquids share of total generation also falls in the Reference case. With oil prices remaining high, alternative fuels are substituted for liquids-fired generation where possible, and the liquids share of generation falls from 5 percent in 2008 to just over 2 percent in 2035. In contrast to coal and liquids, natural gas and renewable energy sources account for increasing shares of total generation. The natural gas share of global generation grows from 22 percent in 2008 to 24 percent in 2035, and the renewable share increases from 19 percent to 23 percent. Renewable generation is the world's fastest-growing source of electric power in the IEO2011 Reference case, rising at an average annual rate of 3.0 percent and outpacing the average annual increases for natural gas (2.6 percent), nuclear power (2.4 percent), and coal (1.9 percent). Government policies and incentives throughout the world support the rapid construction of renewable generation facilities.

figure data

Worldwide, hydroelectricity and wind are the two largest contributors to the increase in global renewable electricity generation, with hydropower accounting for 55 percent of the total increment and wind 27 percent. The mix of the two renewable energy sources in OECD and non-OECD regions differs dramatically, however. In OECD nations, the majority of economically exploitable hydroelectric resources already have been developed. Except in a few cases—notably, Canada and Turkey—there are few opportunities to expand large-scale hydroelectric power projects. Instead, most renewable energy growth in OECD countries is expected to come from nonhydroelectric sources, especially wind. Many OECD countries, particularly those in Europe, have government policies (including feed-in tariffs,¹² tax incentives, and market-share quotas) that encourage the construction of wind and other nonhydroelectric renewable electricity facilities.

figure data

In non-OECD nations, hydroelectric power is the predominant source of renewable energy growth. Strong increases in hydroelectric generation, primarily from mid- to large-scale power plants, are expected in Brazil and in non-OECD Asia (especially, China and India), which in combination account for 80 percent of the total increase in non-OECD hydroelectric generation over the projection period. Growth rates for wind-powered electricity generation also are high in non-OECD countries. The fastest-growing non-OECD regional market for wind power is China, where total generation from wind power plants increases from 12 billion kilowatthours in 2008 to 447 billion kilowatthours in 2035, an average annual increase of 14.2 percent. In China, wind generation accounted for only 2 percent of total renewable generation in 2008 but increases to 22 percent of the 2035 total in the Reference case (Figure 18).

Electricity generation from nuclear power worldwide increases from 2.6 trillion kilowatthours in 2008 to 4.9 trillion kilowatthours in 2035 in the IEO2011 Reference case, as concerns about energy security and greenhouse gas emissions support the development of new nuclear generating capacity. In addition, world average capacity utilization rates have continued to rise over time, from about 65 percent in 1990 to about 80 percent today, with some increases still anticipated in the future. Finally, most older plants now operating in OECD countries and in non-OECD Eurasia probably will be granted extensions to their operating licenses.

There is still considerable uncertainty about the future of nuclear power, however, and a number of issues could slow the development of new nuclear power plants. In many countries, concerns about plant safety, radioactive waste disposal, and nuclear material proliferation may hinder plans for new installations. Moreover, the explosions at Japan's Fukushima Daiichi nuclear power plant in the aftermath of the March 2011 earthquake and tsunami could have long-term implications for the future of world nuclear power development. Even China—where large increases in nuclear capacity have been announced and are anticipated in the IEO2011 Reference case—has indicated that it will halt approval processes for all new reactors until the country's nuclear regulator completes a "thorough safety review"—a process that could last for as long as a year [1]. High capital and maintenance costs may also keep some countries from expanding their nuclear power programs. Finally, a lack of trained labor resources, as well as limited global capacity for the manufacture of technological components, could keep national nuclear programs from advancing quickly.

In the IEO2011 Reference case, 75 percent of the world expansion in installed nuclear power capacity occurs in non-OECD countries, with China, Russia, and India accounting for the largest increment in world net installed nuclear power from 2008 to 2035 (Figure 19). In the Reference case, China adds 106 gigawatts of nuclear capacity between 2008 and 2035, Russia 28 gigawatts, and India 24 gigawatts. Within the OECD, installed nuclear capacity increases to some extent in every region except Australia and New Zealand, where existing policies that prohibit nuclear power are assumed to remain unchanged through 2035.

figure data

Prior to the Fukushima disaster, prospects for nuclear power in OECD Europe had improved markedly over the past few years, and many countries were reevaluating their nuclear power programs to consider plant life extensions or construction of new nuclear generating capacity. The governments of several countries had announced changes in their positions, including the Belgian government, which decided to delay its phaseout plans by 10 years; the German government, which extended the amount of time its nuclear reactors would be allowed to continue operating by between 8 and 14 years; and the Italian government, which formally ended its anti-nuclear policies and announced plans for constructing a new reactor by 2020 [2]. Even in Spain, where the government has remained steadfast in its opposition to the construction of new nuclear power plants, the main political parties—including the ruling Socialist Party—had agreed to allow nuclear facilities to operate longer than 40 years [3]. In addition, Poland and Turkey had announced plans to begin new nuclear generation programs with plants that could become operational soon after 2020 [4].

The projections in the IEO2011 Reference case do not reflect the policy responses of some governments in the wake of the Fukushima disaster, which are likely to curtail the projections for nuclear power from both existing and new plants. The full extent to which governments in Europe and Japan might withdraw their support for nuclear power is uncertain, but some countries have already reversed their nuclear policies since the disaster occurred in March 2011. The German government, for instance, has announced plans to close all nuclear reactors in the country by 2022 [5]. The Swiss Cabinet also has decided to phase out nuclear power by 2034 [6], and Italian voters, in a country-wide referendum, have rejected plans to build nuclear power plants in Italy [7]. In addition, the European Commission has announced that it will conduct a program of stress tests at nuclear reactors operating within the European Union. (Turkey, in contrast, has announced that it will proceed with construction of the country's first nuclear power plant [8].) Still, environmental concerns and the importance of energy security provide support for future European nuclear generation.

In the United States, Title XVII of the Energy Policy Act of 2005 (EPACT2005, Public Law 109-58) authorizes the U.S. Department of Energy to issue loan guarantees for innovative technologies that "avoid, reduce, or sequester greenhouse gases." In addition, subsequent legislative provisions in the Consolidated Appropriation Act of 2008 (Public Law 110-161) allocated $18.5 billion in guarantees for nuclear power plants [9]. That legislation supports a net increase of about 10 gigawatts of nuclear power capacity, which would raise the U.S. total from 101 gigawatts in 2008 to 111 gigawatts in 2035. The projected increase in the IEO2011 Reference case includes 3.8 gigawatts of expanded capacity at existing plants and 6.3 gigawatts of new capacity, including completion of a second unit at the Watts Bar site in Tennessee—where construction was halted in 1988 when it was nearly 80 percent complete—as well as four new nuclear power plants that are projected to be in operation before 2020 to take advantage of Federal financial incentives. One nuclear unit, Oyster Creek, is projected to be retired at the end of 2019, as announced by Exelon in December 2010. All other existing U.S. nuclear units continue to operate through 2035 in the Reference case.¹³

Delivered energy consumption by end-use sector

Understanding patterns in the consumption of energy delivered to end users¹⁴ is important to the development of projections for global energy use. Outside the transportation sector, which at present is dominated by liquid fuels, the mix of energy use in the residential, commercial, and industrial sectors varies widely by region, depending on a combination of regional factors, such as the availability of energy resources, levels of economic development, and political, social, and demographic factors.

Residential sector

Energy use in the residential sector, which accounted for about 14 percent of world delivered energy consumption in 2008, is defined as the energy consumed by households, excluding transportation uses. Residential energy use grows at an average rate of 1.1 percent per year from 2008 to 2035. Projected robust economic growth among the emerging, non-OECD nations translates to much more rapid growth in residential energy use than in the developed OECD nations. As a result, non-OECD residential energy consumption increases at a rate more than seven times that of OECD nations—1.9 percent per year compared with 0.3 percent per year (Figure 20).

The type and amount of energy used by households vary from country to country, depending on income levels, natural resources, climate, and available energy infrastructure. In general, typical households in OECD nations use more energy than those in non-OECD nations, in part because higher income levels allow OECD households to have larger homes and purchase more energy-using equipment. In the United States, for example, GDP per capita in 2008 was $43,321 (in real 2005 dollars per person), and residential energy use per capita was estimated at 38.3 million Btu. In contrast, China's per-capita income in 2008, at $5,777, was only about one-eighth the U.S. level, and its residential energy use per capita, at 4.5 million Btu, was about one-ninth the U.S. level.

For residential buildings, the physical size of a structure is one key indicator of the amount of energy used by its occupants, although income level and a number of other factors, such as weather, also can affect the amount of energy consumed per household. Controlling for those factors, larger homes generally require more energy to provide heating, air conditioning, and lighting. In addition, occupants of larger homes tend to be more affluent, and as a result they tend to own more energy-using appliances, including multiple television sets and computers and a wide array of other electronic devices (such as digital video recorders and set-top boxes) whose operation consumes considerable amounts of electric power [10].

Smaller structures usually require less energy, because they contain less space to be heated or cooled, produce less heat transfer with the outdoor environment, and typically have fewer occupants. For instance, residential energy consumption is lower in China (where the average residence currently has an estimated 300 square feet of living space or less per person) than in the United States, where the average residence has an estimated 615 square feet of living space per person [11].

Although the IEO2011 projections account for marketed energy use only, households in many non-OECD countries still rely heavily on traditional, non-marketed energy sources, including wood and waste, for heating and cooking. Much of Africa remains unconnected to power grids, and the International Energy Agency estimates that 1.4 billion people do not have access to electricity, most of them located in Sub-Saharan Africa [12]. About 40 percent of the world population—largely in Africa, India, and the rest of non-OECD Asia (excluding China)—still relies on traditional biomass for cooking fuel. As incomes rise in the developing world over the course of the projection, households replace traditional fuels with marketed fuels, such as propane and electricity, as they become more widely accessible. Although complete coverage of nonmarketed energy use is not included in the IEO Reference case, the trend toward replacing nonmarketed fuels is reflected in the growth in demand for marketed fuels.

Commercial sector

The commercial sector—often referred to as the service sector or the services and institutional sector—consists of businesses, institutions, and organizations that provide services. The sector, which accounted for 7 percent of total delivered energy consumption in 2008, encompasses many different types of buildings and a wide range of activities and energy-related services. Commercial energy use grows by an average of 1.5 percent per year from 2008 to 2035 in the IEO2011 Reference case. Examples of commercial-sector facilities include schools, stores, correctional institutions, restaurants, hotels, hospitals, museums, office buildings, banks, and sports arenas. Most commercial energy use occurs in buildings or structures, supplying services such as space heating, water heating, lighting, cooking, and cooling. Energy consumed for services not associated with buildings, such as for traffic lights and city water and sewer services, is also categorized as commercial energy use.

Economic growth also determines the degree to which additional activities are offered and used in the commercial sector. Higher levels of economic activity and disposable income lead to increased demand for hotels and restaurants to meet business and leisure requirements; for office and retail space to house and service new and expanding businesses; and for cultural and leisure space such as theaters, galleries, and arenas. In the commercial sector, energy intensity—or energy use per dollar of income as measured by GDP— is much lower in non-OECD countries than in OECD countries. Non-OECD commercial energy intensity in 2008, at 281 Btu per dollar of GDP, was only about half the OECD level of 540 Btu per dollar of GDP.

In the future, slower expansion of GDP and low or declining population growth in many OECD nations contribute to slower anticipated rates of increase in commercial energy demand. In addition, continued efficiency improvements moderate the growth of energy demand over time, as energy-using equipment is replaced with newer, more efficient stock. Conversely, continued economic growth is expected to include growth in business activity, with its associated energy use, in areas such as retail and wholesale trade and business, financial services, and leisure services. The United States is the largest consumer of commercial delivered energy in the OECD and remains in that position throughout the projection, accounting for about 44 percent of the OECD total in 2035.

In non-OECD nations, economic activity and commerce increase rapidly, fueling additional demand for energy in the service sectors. Population growth also is more rapid than in OECD countries, portending increases in the need for education, health care, and social services and the energy required to provide them. In addition, as developing nations mature, they transition to more service-related enterprises, increasing demand for energy in the commercial sector. The energy needed to fuel growth in commercial buildings will be substantial, and total delivered commercial energy use among non-OECD nations grows by 2.8 percent per year from 2008 to 2035 in the Reference case (Figure 21).

Industrial sector

Energy is consumed in the industrial sector by a diverse group of industries—including manufacturing, agriculture, mining, and construction—and for a wide range of activities, such as processing and assembly, space conditioning, and lighting. The industrial sector consumed 52 percent of global delivered energy in 2008, and its energy consumption grows by an average of 1.5 percent per year over the projection. Industrial energy demand varies across regions and countries of the world, based on the level and mix of economic activity and technological development, among other factors. Industrial energy use also includes natural gas and petroleum products used as feedstocks to produce non-energy products, such as plastics and fertilizer.

In the IEO2011 Reference case, industrial sector energy use increases by 2.0 percent per year in non-OECD nations, compared with 0.5 percent per year in OECD economies (Figure 22). Growth in non-OECD industrial energy use strongly outpaces the growth in OECD economies, not only because of faster anticipated economic expansion but also because of the composition of industrial sector production. OECD economies generally have more energy-efficient industrial operations than non-OECD countries, as well as a mix of industrial output that is more heavily weighted toward non-energy-intensive industry sectors. As a result, the ratio of industrial energy consumption to total GDP tends to be higher in non-OECD economies than in OECD economies. On average, industrial energy intensity (the consumption of energy consumed in the industrial sector per dollar of economic output) in non-OECD countries is double that in OECD countries.

It is also instructive to compare the mix of industrial sector fuels used in the OECD and non-OECD nations in the IEO2011 Reference case. Of the five projected industrial fuel categories (renewable, electricity, natural gas, coal, and liquids), liquids is the dominant fuel throughout the projection period for OECD nations due to continued significant growth in the chemical sector in both the United States and the European Union, while coal is dominant in non-OECD countries due in part to China's continuing heavy reliance on this accessible and relatively inexpensive resource for its coal-reliant industries such as steel and cement. Coal for OECD nations drops from 13 percent of the total industrial fuel mix in 2008 to 11 percent in 2035, due in part to a decline in the steel industry. Renewable fuel (biomass) makes up a small but growing percentage of the industrial sector energy mix in OECD nations (from 7 percent in 2008 to 10 percent in 2035), but in the non-OECD nations the renewable energy percentage of all fuels consumed drops slightly, because renewable fuel consumption grows more slowly than consumption of fossil fuels. In both the OECD and non-OECD regions, natural gas and electricity account for increasing shares of total industrial fuel use.

Transportation sector

Energy use in the transportation sector includes the energy consumed in moving people and goods by road, rail, air, water, and pipeline. The transportation sector accounted for 27 percent of total world delivered energy consumption in 2008, and transportation energy use increases by 1.4 percent per year from 2008 to 2035. The growth in transportation energy demand growth in the IEO2011 Reference case is largely a result of increases projected for non-OECD nations, where fast-paced gains in GDP raise standards of living and, correspondingly, the demand for personal travel and freight transport to meet consumer demand for goods. Non-OECD transportation energy use increases by 2.6 percent per year, compared with 0.3 percent per year projected for the OECD nations, where consuming patterns are already well established and slower growth of national economies and populations keeps transportation energy demand from increasing appreciably (Figure 23).

figure data

The road transport component includes light-duty vehicles, such as automobiles, sport utility vehicles, minivans, small trucks, and motorbikes, as well as heavy-duty vehicles, such as large trucks used for moving freight and buses used for passenger travel. Growth rates for economic activity and population are the key factors in transportation energy demand. Economic growth spurs increases in industrial output, which requires the movement of raw materials to manufacturing sites, as well as the movement of manufactured goods to end users.

For both non-OECD and OECD economies, increasing demand for personal travel is a primary factor underlying projected increases in energy demand for transportation. Increases in urbanization and in personal incomes have contributed to increases in air travel and motorization (more vehicles per capita) in the growing economies. For freight transportation, trucking leads the growth in demand for transportation fuels. In addition, as trade among countries increases, the volume of freight transported by air and marine vessels increases rapidly. Increases in the transport of goods result from continued economic growth in both OECD and non-OECD economies.

World economic outlook

Economic growth is among the most important factors to be considered in projecting changes in world energy consumption. In IEO2011, assumptions about regional economic growth—measured in terms of real GDP in 2005 U.S. dollars at purchasing power parity rates—underlie the projections of regional energy demand. Starting in 2008, the world experienced its worst recession of the past 60 years [13]. The recovery began for most economies in 2009 but was uneven across world regions. The world economy ran into a number of major obstacles in 2010, as a result of which world GDP growth decelerated to a below-trend pace of less than 3.0 percent in the second half of the year.

The weakest points of the global economy during the current expansion cycle have been in advanced economies, where household balance sheets remain under pressure because of high unemployment, weak demand for residential real estate, heavy debt loads, and tight credit. Household spending and bank lending have not been sufficiently robust to offset the phasing out of fiscal and monetary stimulus policies implemented in 2009 and 2010. Global economic growth is expected to improve over the next several years, however, as a result of increasing business investment, improving labor markets, and rising growth in world trade.

The emerging markets, particularly the economies of Asia (led by China and India), appear to be recovering quickly and driving current world economic growth. The latest releases of factory output data show that while the advanced economies' aggregate industrial production remains far below its pre-crisis peak, the corresponding number for emerging markets has surpassed it [14]. Thanks to their rapidly rising income and wealth, non-OECD Asian households managed to increase real spending through the 2008-2009 recession, while consumer spending was falling in North America and OECD Europe [15]. In fact, in the emerging countries, rising commodity prices and a narrowing gap between what is produced and what can be produced at full employment raise possible inflationary risks. Rising food prices also present inflationary risks that can slow economic recovery, although a recent increase in food prices related to weather damage should abate by 2012.

From 2008 to 2035, growth in world real GDP (on a purchasing power parity basis) averages 3.4 percent per year in the Reference case (Table 2). In the long term, the ability to produce goods and services (the supply side) determines the growth potential of each country's economy. Growth potential is influenced by population growth, labor force participation rates, capital accumulation, and productivity improvements. In addition, for the developing economies, progress in building human and physical capital infrastructures, establishing credible regulatory mechanisms to govern markets, and ensuring political stability also are important determinants of medium- to long-term growth potential.

figure data

Annual growth in world GDP over the 27-year projection period in IEO2011 (3.4 percent per year) is similar to the rate recorded over the past 30 years (3.3 percent per year). Growth in the more mature, industrialized OECD economies is expected to be slower, and growth in the emerging non-OECD economies is projected to be higher, than in the past. The combined GDP of OECD countries, which increased by an annual average of 2.9 percent from 1977 to 2008, averages 2.1 percent per year from 2008 to 2035 in the Reference case. In contrast, the combined GDP of non-OECD countries, which increased by an annual average of 3.7 percent from 1977 to 2008, averages 4.6 percent per year growth from 2008 to 2035, based in a large part on the strong growth projected for China and India. With non-OECD economies accounting for an increasing share of world GDP, their more rapid economic growth rates offset the slower growth rates for OECD economies in the Reference case (Figure 24).

OECD economies

figure data

In the IEO2011 Reference case, overall OECD economic growth averages 2.1 percent per year, and U.S. GDP growth averages 2.5 percent per year from 2008 to 2035 (Figure 25). The U.S. recession, which began in December 2007, is the longest of the 10 recessions the United States has experienced since 1947, with four quarters of negative growth. It is also the country's deepest recession since 1957. In 2009, U.S. GDP declined by 2.6 percent. In 2010, growth increased by 2.8 percent per year, about the same as the 2.9-percent average of the past two decades [16], leading to a slower recovery of pre-recessionary levels. The U.S. economic recovery is expected to intensify in 2011, with employment recovering more slowly. As a result, real GDP returns to its 2008 pre-recessionary level by 2011, but employment rates do not return to 2008 levels until 2019.

Canada was also affected substantially by the world recession, with GDP contracting by 2.5 percent in 2009. The strong trade ties between Canada and the United States mean that weak U.S. economic growth, coupled with a relatively strong Canadian dollar (by historical standards), helped lead Canada into economic recession [17]. Since the Canadian dollar began its 50-percent appreciation in early 2003, Canada's export sector, particularly in manufacturing, has experienced slower growth. The strength of the Canadian dollar has been the result of both the general decline in the value of the U.S. dollar and strong commodity prices.

Canada's economic growth in 2011 is expected to be lower than its 2010 growth of 2.9 percent, as the impact of the 2009 fiscal stimulus abates. The Canadian government had committed around $16 billion (Canadian) to 23,000 infrastructure programs in 2009 as the recession deepened [18]. Plans to end the stimulus spending were extended beyond March 31, 2011, when the government announced its decision to extend the deadline for spending to the end of October 2011 in order to ensure that projects under construction by March 31 would be able to be completed. In the near term, Canada's economic growth will depend on the U.S. economic recovery, and rising commodity prices over the medium and long term will lead to increased export growth. In the long term, as U.S. consumer demand returns and export markets improve, economic growth in Canada is expected to return to its potential. In the IEO2011 Reference case, Canada's GDP grows by an average of 2.1 percent per year from 2008 to 2035.

For the two other countries in the OECD Americas region, Mexico and Chile, prospects for economic growth are higher than those for the United States and Canada. GDP growth in Mexico and Chile combined averages 3.7 percent per year from 2008 to 2035 in the Reference case. Mexico was the Western Hemisphere's hardest-hit economy in the 2008-2009 recession [19]. Not only did it suffer when worldwide commodity exports collapsed, but the impact of the recession was compounded by the outbreak of H1N1 "swine flu" in 2009. Its prospects for short-term growth may also be dampened by increased drug-related violence in some parts of the country that erodes business and consumer confidence [20]. Mexico's high reliance on the United States as a market for its manufacturing exports (about 80 percent of Mexico's exports are sent to the United States) suggests that its economic recovery also will depend on the U.S. recovery. Rising world oil prices and recovery of the U.S. economy are expected to support Mexico's return to trend growth. As commodity prices for base metals continue to increase, Chile's exports are expected to show robust growth. With relatively small fiscal deficits, a stable currency, sound monetary policy, low inflation, and reduced risk in financial systems, Chile's prospects for future economic growth are optimistic.

In OECD Europe, after declining by 3.9 percent in 2009, GDP returned to positive growth in 2010, increasing by an estimated 2.0 percent. In 2011, GDP growth is projected to slow to 1.7 percent as stimulus funds are withdrawn and several major economies adopt austerity measures to address budgetary deficits. In 2010, Greece and Ireland had to accept rescue packages to avoid debt crises. In Greece, a rescue package assembled by the International Monetary Fund (IMF), European Union, and European Central Bank was implemented in May 2010 to prevent default [21]. In Ireland, a similar bailout provided funds from the European Union and IMF to recapitalize the nation's banking sector after substantial bad loans were incurred when a real estate market bubble collapsed [22].

There still are concerns that several other "Eurozone" nations will need financial assistance—notably, Portugal and the European Union's fourth-largest economy, Spain. In fact, European Union governments are now considering ways to strengthen the financial terms of the Eurozone's financial rescue fund. Germany, in particular, as the European Union's largest economy, is concerned about the way in which future rescue packages will be implemented and their potential impacts on the German economy [23]. The success of the measures taken to repair the health of the European economies will affect regional GDP growth in the mid- to long term. In the IEO2011 Reference case, OECD Europe's total GDP does not return to its 2008 level until 2012. Economic growth in the region averages 1.8 percent per year from 2008 to 2035, below the increase of 2.1 percent per year for the OECD as a whole.

On March 11, 2011, a devastating, magnitude 9.0 earthquake, followed by a tsunami, struck northeastern Japan, killing thousands of people and inflicting tens of billions of dollars worth of damage on the Japanese infrastructure in what Prime Minister Naoto Kan characterized as "Japan's most severe crisis since the war ended 65 years ago" [24]. In the short term, it is impossible to estimate the extent of damage from the disaster to Japan's economy, and IEO2011 makes no attempt to incorporate the ultimate effects of the earthquake in the Reference case. In the longer term, after a return to normalcy and as the economy recovers, the IEO2011 Reference case anticipates that Japan's aging labor force and declining population will support only slow economic growth, averaging 0.5 percent per year from 2008 to 2035.

Outside of Japan, more robust economic growth is projected for OECD Asia. In South Korea, GDP growth averages 2.9 percent per year from 2008 to 2035. South Korea, historically known for export success and large current-account surpluses, experienced trade deficits in 2008 as oil prices rose and exports declined. The situation was reversed in 2009 and 2010, allowing Korea to run external surpluses again. In response to the 2008 recession, the Bank of Korea kept interest rates low. In July 2010, for the first time since 2009, the Bank increased rates by one-quarter point, following up with another one-quarter point in November 2010 as a preventive measure against rising inflation. Further periodic increases in the interest rate are expected throughout 2011 and into 2012 [25]. A resurgence of world demand for Korean goods will support South Korea's economic recovery in the near term. In the long term, however, its growth is projected to taper off as the growth of its labor force slows.

GDP growth in Australia/New Zealand averages 2.7 percent per year from 2008 to 2035 in the IEO2011 Reference case. Long-term prospects in both countries are relatively healthy, given their consistent track records of fiscal prudence and structural reforms aimed at maintaining competitive product markets and flexible labor markets. The reserve banks of both countries were proactive in managing their response to the global recession of 2008-2009. Starting in 2008, the Reserve Bank of Australia and the Reserve Bank of New Zealand eased monetary policies to lessen the impact of the global economic downturn [26].

Compared with many other industrialized nations, Australia's economy rebounded quickly. In fact, Australia was the first "Group of 20" nation to begin tightening monetary policy and increasing interest rates (in October 2009). Interest rates have been increased periodically since then, to 4.75 percent in November 2010, as the Reserve Bank of Australia has addressed concerns about the threat of inflation [27]. Large-scale flooding in Australia from December 2010 to January 2011 caused extensive damage—in excess of $15 billion—in the mining state of Queensland, a major resource-producing area that accounts for one-fifth of Australia's economy.

As a result, the country's export potential in 2011 was compromised and GDP growth potential was dampened significantly [28]. Australia is expected to return to GDP growth of about 2.5 percent in 2011, before accelerating again in 2012 and beyond [29].

Non-OECD economies

figure data

Overall economic growth in the non-OECD region averages 4.6 percent per year from 2008 to 2035 in the IEO2011 Reference case (Figure 26), and growth in non-OECD Europe and Eurasia as a whole averages 2.7 percent per year. After several years of strong regional growth (the region's GDP grew by an average of 6.7 percent per year from 2000 to 2008), GDP in non-OECD Europe and Eurasia contracted by 7.3 percent in 2009. The region has a fairly diverse set of economies, and while some economies suffered deep recessions in 2008-2009, others saw economic growth slow but remain positive.

For the nations of non-OECD Europe and Eurasia, exports have led to increased growth in 2010, with household consumption showing signs of recovery in 2011. In the face of large fiscal deficits, government expenditures have been under pressure in many nations of the region, and fiscal austerity measures are expected to restrain the pace of economic growth in the region into the medium term. Monetary policy also will have to be relatively cautious, given that higher prices for key imported commodities and food and a return of upward pressure from wages could increase the risk of building inflationary expectations.

Beginning in late 2008, it became more difficult for banks and other entities in non-OECD Europe and Eurasia—particularly, Russia, Kazakhstan, and Ukraine—to gain access to foreign loans [30]. The impact was softened somewhat by higher world market prices for commodity exports, but with the subsequent collapse of commodity prices and worsening global economic situation, the region's economic growth declined sharply. In the mid- to long term, a return to high world oil prices is expected to stimulate investment outlays, especially in the energy sector of the Caspian region. Given the volatility of energy market prices, however, it is unlikely that the economies of non-OECD Europe and Eurasia will be able to sustain their recent growth rates until they have achieved more broad-based diversification from energy production and exports.

Much of the growth in world economic activity between 2008 and 2035 occurs among the nations of non-OECD Asia, where regional GDP growth averages 5.3 percent per year. China, non-OECD Asia's largest economy, continues to play a major role in both the supply and demand sides of the global economy. IEO2011 projects an average annual growth rate of approximately 5.7 percent for China's economy from 2008 to 2035—the highest among all the world's economies.

Non-OECD Asia has led the recovery from the 2008-2009 global economic recession. In China, substantial stimulus and tax breaks in 2009, along with considerable loosening of lending terms, allowed GDP growth to reach 9.1 percent, even with considerable deceleration of exports. Further, growth in property sales and real estate prices was substantial in 2010, supporting renewed strength in construction activity. In fact, there is growing concern on the part of the Chinese government about a possible housing bubble. In an effort to control rapidly increasing prices in the country's real estate market, the government imposed restrictions on property acquisitions in more than 30 Chinese cities, making it more difficult for nonresidents to buy homes and for current homeowners to purchase second residences [31].

The growth of domestic demand in China is supported by an increase in credit expansion, despite the repeated tightening moves by the People's Bank of China—particularly in raising the reserve requirement ratio. Many non-OECD Asian economies that are trade partners with China also have benefited from their economic ties. Although those emerging Asian economies—particularly those strongly dependent on exports for revenues—experienced profound decreases in economic activity in 2008 and into 2009 as demand for goods among OECD economies declined sharply, the recovery in China has bolstered their recovery.

Structural issues that have implications for economic growth in China in the mid- to long term include the pace of reform affecting inefficient state-owned companies and a banking system that is carrying a significant amount of nonperforming loans. In large part, China's economic base has changed from agriculture and heavy industry to light manufacturing and services. In the late 1970s, the agriculture sector employed nearly 70 percent of China's labor and produced around 30 percent of its GDP; currently, the agriculture sector's employment and output shares are 43 percent and 12 percent, respectively [32]. By shifting its factors of production away from the low-productivity agricultural sector, China has boosted productivity significantly, adding to long-run prospects for growth. As China shifts from labor-intensive to more capital-intensive means of production, availability of capital becomes crucial. Development of domestic capital markets continues in the IEO2011 Reference case, providing macroeconomic stability and ensuring that China's large domestic savings are used more efficiently.

India's GDP growth averages 5.5 percent per year from 2008 to 2035 in the IEO2011 Reference case. India was affected far less by the global economic downturn than were many other nations of the world, with low dependence on exports, accommodating economic policies, and robust capital inflows supporting domestic activity [33]. India's GDP grew by 6.8 percent in 2009 and 8.3 percent in 2010 [34]. In the short term, concerns about sharply rising inflation—primarily because of increasing food and energy costs—are expected to result in increased tightening of monetary supply by the Reserve Bank of India. In the medium term, favorable export growth, continued economic reforms, and greater contributions from the service and construction sectors are expected to keep the economy advancing at rates near 7.0 percent through 2020. Accelerating structural reforms—including ending regulatory impediments to the consolidation of labor-intensive industries, labor market and bankruptcy reforms, and agricultural and trade liberalization—remain essential for stimulating potential growth and reducing poverty in India over the mid- to long term.

Outside China and India, recovery from the global recession in the countries of non-OECD Asia has varied. Those economies that are export-dependent (including Hong Kong, Indonesia, Singapore, and Taiwan) strengthened substantially in 2010, as demand in China supported their recovery. For nations where domestic demand has remained relatively healthy (including Vietnam and the Philippines), the impact of the global recession was less severe, but the recovery into the medium term may be more muted than in the years before the recession, because weaker demand in key export markets—notably, the United States and Europe—may dampen the potential to increase trade for some years into the future [35]. Overall, long-term economic activity in the nations of non-OECD Asia remains positive. From 2008 to 2035, national economic growth rates for the region—excluding China and India—average 4.5 percent per year in the Reference case.

In the Middle East, oil exports account for a substantial portion of GDP growth for the region's key economies. A sharp decline in world oil prices from their peak in mid-July 2008 had a significant impact on the region in 2009. Since then, oil prices have continued to rise—in part because of the recovering demand for liquids but also as a result of the political unrest that began with protests in the African countries of Tunisia and Egypt and then spread to Libya and to the Middle Eastern countries Bahrain, Yemen, Iran, and Syria. In the short term, it is difficult to balance the positive impact of rising revenues from oil exports in the Middle East against growing instability and political uncertainty [36]. Extremely high unemployment rates (particularly among the region's substantial younger populations), combined with concerns over rising food prices, sparked the domestic unrest. Political turmoil and domestic unrest threaten to depress consumer confidence, and looking forward inflationary risks could be a key factor affecting sentiment and consumer demand. The Middle East's reliance on oil and natural gas revenues continues throughout the projection period. In the long run, rising oil prices and rebounding demand for the region's export commodities support favorable prospects for economic growth.

The impact of the global recession on the economies of Africa varied across the continent. Most countries in sub-Saharan Africa have recovered quickly from the global crisis, with the oil-exporting countries, in particular, benefiting from increasing oil prices. Africa continues to gain major debt relief under the Heavily Indebted Poor Countries (HIPC) initiative. Despite the overhang of the global economic recession in 2010, four African countries reached key HIPC milestones, thus gaining access to more than $18.8 billion in debt relief [37]. Risks include continued uncertainty in the global financial markets and low growth in the more developed African countries. If financial flows from the leading economies in sub-Saharan Africa fall significantly because of fiscal retrenchment or risk aversion, the net effect will be a dampening of growth prospects in the region.

Recent social and political unrest in Tunisia, Egypt, Algeria, and especially Libya—where on March 19, 2011, an alliance of nations began efforts backed by the United Nations to establish a no-fly zone to ensure the safety of Libyan citizens—has added considerable uncertainty to prospects for northern Africa, especially in the near term [38]. It remains to be seen how events will unfold and how they will the affect the region's economic development in the mid- to long term. In the IEO2011 Reference case, Africa's combined economy grows at an average annual rate of 3.7 percent from 2008 to 2035, supported by the expansion of exports and robust domestic demand in many of the continent's national economies. Nevertheless, both economic and political factors—such as low savings and investment rates, lack of strong economic and political institutions, limited quantity and quality of infrastructure and human capital, negative perceptions on the part of international investors, protracted civil unrest and political disturbances, and chronic widespread disease—present formidable obstacles to growth in a number of African countries.

In Central and South America, the impact of the global economic downturn varied across the nations of the region. Brazil, Colombia, Peru, and Uruguay all have experienced strong recoveries, but sustainable recoveries in Ecuador and Venezuela remain in question [39]. Further, economies with strong trade ties to Brazil—notably, Argentina and Paraguay—are likely to benefit from that relationship.

Brazil—the region's largest economy—experienced a relatively short and mild recession, and its recovery was much stronger than expected by the government [40]. As a result, authorities have been more concerned about an economy that is expanding too quickly, raising fears that fast-paced increases in demand growth will not be met by increased output and thus will lead to rising prices and high inflation. As the global recession deepened, the Central Bank of Brazil trimmed interest rates to a record low of 8.75 percent in July 2009; however, Brazil was among the first nations to begin increasing interest rates, starting in April 2010, to 11.25 percent in January 2011 as the Bank tried to slow the pace of economic expansion [41]. Brazil's continued favorable economic prospects are supported by domestic and foreign investment, along with strengthening domestic consumption.

Investment in the countries of Central and South America is constrained by adverse economic circumstances, and revenues from commodities exports are not expected to provide the level of government revenue that were seen from 2003 to 2008. The proximity of the region to the United States and the trade relationships of its national economies with the U.S. economy suggest that the region's recovery will be linked, in part, to the pace of the U.S. recovery. Even so, the long-term prospects for Central and South America remain positive. Most countries in the region have flexible exchange rates, positive trade balances, and relatively low fiscal deficits and public debts. Regional inflation is lower than it was in the mid-1990s, and a relatively young labor force supports the region's economic growth prospects over the next 30 years. Economic growth in Central and South America averages 3.8 percent per year from 2008 to 2035 in the IEO2011 Reference case, as the region benefits from the expected recovery in world economic growth after 2010, and foreign capital flows are revived.