Urban areas are the engine of the world economy, behind 80 per cent of the global economic output. And their number is on the rise
Throughout history, cities have played a role as engines of change. They are centres of commerce and economic and social development, offering the promise of a better life. Currently, more than half of world’s population lives in cities, and this migration from rural to urban developments is on the rise. By 2050, two-thirds of the global population will have migrated into cities, according to United Nations estimates. The majority of city dwellers today live in settlements of less than 500,000 inhabitants, and about one in eight live in megacities, which have 10 million or more inhabitants. The number of megacities has nearly tripled since 1990 to 33 megacities today. The UN predicts this figure to increase to 41 by 2030.
Urban economies reshape global markets
The world’s urban population is growing by 65 million annually, and it is these urban economies that will reshape global markets, according to McKinsey Global Institute reports. “The key to the cities’ success is productivity. It is much higher in urban than in rural areas, leading to higher wages and thereby attracting more workers,” explains Carsten Menke, Commodity Analyst at Julius Baer. The steady flow of workers into the labour market facilitates the matching of skills for companies, which fosters a greater transfer of knowledge. “As a consequence, there are further productivity gains, setting in motion a self-supporting mechanism,” Menke adds. High degrees of specialisation, strong innovative capacities and higher levels of skills are similarly behind additional productivity gains in the urban centres. In 2025, the world’s most productive 600 cities – including more than 440 located in emerging markets out of which there will be more than 220 in China alone – are forecast to have raised their share of global GDP to nearly 65 per cent. The population of these 600 cities is predicted to account for nearly half of the global economic growth until 2025.
China – a driver behind global urbanisation
China has been at the forefront of global urbanization for the past 30 years and will continue to be so from a size perspective. With 350 million people moving into cities over the next decade, the country is undergoing one of the largest migrations in human history. By 2020, it will have over 220 with more than a million inhabitants. Rapid urbanisation has fuelled a domestic real estate and infrastructure boom, and the trend was among the main drivers of the past decade’s global commodity super cycle. While the demand for commodities tied to these infrastructure development industries should continue to grow, it is now the consumer side of the story that is more compelling, Menke explains. Why? Because urbanisation not only leads to the construction of infrastructure, it also triggers the emergence of a middle class with discretionary income.
Emerging Chinese middle class on a spending spree
In 2000, only 4 per cent of urban households in China were middle class. Twelve years later more than two-thirds of the country’s urban population was part of it, according to a McKinsey&Company report. In 2014, the middle class in China reached 474 million, and by 2025, the number is expected to reach 800 million. More spending power equates to higher overall consumption. The burgeoning Chinese middle class can now afford a totally new lifestyle, which could buoy demand for commodities used by the car and jewellery industries, but also for consumer electronics, and many other goods and services. This evolution of having increasing discretionary income also creates opportunities in the luxury goods and tourism sectors. The Chinese middle class is forecast to be behind more than a third of global spending on luxury goods by 2015.
Asia and Africa − the next continents in line
The world’s urban population is expected to surpass six billion by 2045. Much of this expected urban growth will take place in countries of the developing regions. This shift into cities is fundamental for low-income rural societies to join the ranks of middle- and high-income countries. Asia and Africa will take the lead, with their urban population likely to grow by 1.4 billion and 800 million respectively by 2050. In Asia, city growth will be concentrated to India and China, while it will be much more broad-based in Africa. As a result, these countries will face numerous challenges in meeting the needs of their growing urban populations, including for housing, infrastructure, transportation, energy and employment, as well as for basic services such as education and health care.
Important development challenge
“Managing urban areas has become one of the most important development challenges of the 21st century,” said John Wilmoth, Director of UN Department of Economic and Social Affairs’ (DESA) Population Division in the 2014 revision of the division’s ‘World Urbanization Prospects’ report. Among those challenges are sustainable urban planning and good governance, according the report, which also underscores that few factors will shape the world’s development as fundamentally as the distribution of the world’s population.
Are you interested in learning more about urbanization? Your dedicated relationship manager would be delighted to provide you with additional information.