World needs to ramp up infrastructure investment to support economic growth: McKinsey

The world needs to dramatically increase spending in infrastructure by about 1 trillion U.S. dollars per year in the next 15 years just to keep pace with economic growth, according to a new report released by the McKinsey Global Institute.

"The world spends some 2.5 trillion dollars a year on the transportation, power, water, and telecom systems that underpin economic activity and provide essential services. But this has not been enough to avoid significant gaps, and investment needs are only growing steeper," McKinsey said earlier this week in a report on bridging global infrastructure gaps.

McKinsey estimated that the world needs to invest an average of 3.3 trillion dollars a year in infrastructure simply to keep pace with currently expected annual global growth rate of 3.3 percent from 2016 through 2030. That adds up to a cumulative investment need of 49 trillion dollars over the entire period.

"If global growth averages one percentage point slower, the total investment need would fall by about 13 trillion dollars. If it exceeds that rate by one percentage point, the figure would be about 14 trillion dollars higher," the report said.

While the United States and European Union have substantial infrastructure needs, emerging economies account for about 60 percent of global infrastructure needs in the next 15 years, according to the report.

"China' s needs for the future remain vast despite its recent overinvestment; this will hold true even if the country experiences the economic slowdown that many are predicting," the report said.

However, infrastructure investment has actually declined as a share of gross domestic product (GDP) in 11 of the group of 20 (G20) economies, including the United States, Russia and Mexico, since the global financial crisis, despite glaring gaps and years of debate about the importance of improving infrastructure, according to McKinsey.

"If the current trajectory of underinvestment continues, the world will fall short by roughly 11 percent, or 350 billion dollars a year. The size of the gap triples if we consider the additional investment required to meet the new UN Sustainable Development Goals," the report said, warning that chronic underinvestment in infrastructure could erode future growth potential and productivity.

McKinsey estimated that one dollar of infrastructure investment can raise GDP by 20 cents in the long run by boosting productivity, and ramping up infrastructure investment over the next decade in line with economic needs could add about 0.6 percent to global GDP.

"The boost could be even larger in countries with large current infrastructure gaps: the United States, for example, could boost GDP by about 1.3 percent, while Brazil could add 1.5 percent," the report said. Enditem