According to PwC, the global economic power shift away from the established advanced economies in North America, Western Europe and Japan will continue over the next 35 years, despite a projected slowdown in Chinese growth after around 2020.
This is one of the key findings from the latest report from PwC economists on ‘The World in 2050: Will the shift in global economic power continue?’ This presents long term projections of potential GDP growth up to 2050 for 32 of the largest economies in the world.
The report indicates that the world economy is projected to grow at an average of just over 3%/y from 2014 – 2015, doubling in size by 2037 and nearly tripling by 2050. But there is likely to be a slowdown in global growth after 2020, as the rate of expansion in China and some other major emerging economies moderates to a more sustainable long term rate, and as working age population growth slows in many large economies.
John Hawksworth, PwC Chief Economist, commented: “There are different ways of comparing the size of economies, but we project that China will be the largest economy by 2030 on any measure. However, we also expect its growth rate to slow markedly after around 2020 as its population age, its high investment rate runs into diminishing marginal returns and its needs to rely more on innovation than copying to boost productivity. Eventual reversion to the global average has been common for past high growth economies such as Japan and South Korea and we expect China to follow suit.
“India has the potential to sustain the higher growth rate for longer and become a US$10 trillion economy by around 2020 in purchasing power (PPP) terms, or around 2035 at market exchange rates. But this relies on India making sustained progress on infrastructure and investment, institutional reforms and boosting education levels across the whole population”.
Aside from China and India, other highlights from PwC’s projections are:
- Emerging economies like Indonesia, Brazil and Mexico have the potential to be larger than the UK and France by 2030, with Indonesia possibly rising as high as 4th place in the world rankings by 2050 if it can sustain growth friendly policies.
- Nigeria, Vietnam and the Philippines are notably risers in the global GDP ranking in the long term, reflecting relatively high projected average growth rates of approximately 4.5 – 5.5%/y over the period to 2050.
- Malaysia is also projected to grow at approximately 4%/y on average in the period to 2050, which is higher than China’s projected average growth rate of approximately 3.5%/y over this period, and an impressive performance for what is already a middle income country.
- Colombia is also an economy that PwC projects to grow at a relatively healthy long term rate of approximately 4%/y over the period to 2050, noticeably faster than its larger Southern American neighbours like Brazil and Argentina.
- Japanese growth is projected to be the slowest of all 32 countries covered in total terms, driven in part by a steadily declining population; as a result Japan is projected to fall from 4th to 7th place in the global GDP ranking over the period to 2050.
- European economies tend to slide down the rankings, with growth rates in the major Eurozone economies projected to average only approximately 1.5 – 2.0%/y to 2050.
- Poland is projected to have the highest average growth rate of the large EU economies, and also to outperform Russia in terms of long run growth.
PwC also estimates what its projections would mean for shares of global GDP at PPPs (assuming the smaller countries not covered in the model grow on average as a group at the same rate as the 32 large economies covered by the study).
- China’s share of world GDP is projected to flatten off at approximately 20% from the mid-2020s onwards as its growth rate reverts to the global mean.
- The US’ share declines gradually from approximately 17% now to approximately 14% by 2050, while India’s potentially doubles from approximately 7% now to be more or less neck and neck with the US by the middle end of the century in PPP terms.
- The EU’s overall share of world GDP is projected to decline from approximately 17.5% now to only around 12% by 2050, assuming that total EU GDP grows at the same rate as the aggregate for the largest seven EU economies covered by the study.
John Hawksworth comments: “Europe need to up its game if it is not to be left behind by this historic shift of global economic power, which is moving us back to the kind of Asian-led world economy last seen before the Industrial Revolution. The US may hold up better, provided it can remain at the global technological frontier”.
These projections assume, however, that emerging markets will follow broadly growth friendly policies. In practice, not all may do so, and therefore not all of these economies will fulfil the potential indicated by the PwC growth projection, although some could also exceed the projections if they can accelerate their investment rates and institutional reforms.
How should businesses approach emerging markets?
The PwC analysis has a number of high level messages for business looking to develop their market strategies, including:
- It may be difficult to sustain the growth rates of the 2000 to 2012 period in the major emerging markets, given the combination of economic bottlenecks and institutional deficiencies. Some slowdown should be factored into business plans and investment appraisals.
- Emerging markets vary greatly in their institutional strengths and weaknesses, which need to be carefully assessed. There could also be major differences in institutional strengths between industry sectors within countries. Deep local knowledge that is updated in real time is critical to manage businesses successfully in an emerging market environment. Having the right local partners to navigate you through local political, legal and regulatory systems is also critical. Identifying and promoting local talent who understand local business and social cultures better than any outsider will also be an increasing source of comparative advantage.
- For large companies making strategic investments in frontier markets like sub-Saharan Africa, part of their contribution could be to try and improve the local institutional framework. This could involve offering appropriate technical assistance and advice to local governments in areas like corporate governance, fiscal policy and intellectual property rights protection. It could also involve investing in social and economic infrastructure (e.g. schools, roads, railways, power and water networks) where these are vital to a company’s longer term success in a region.
- Finally, mature markets in North America and Europe will remain very significant players in the global economy for decades to come even if their growth rates average only approximately 2%. PwC’s analysis shows, for example, that average income levels per person (at PPPs) in 2050 will still only be approximately 40% of average US levels in China and approximately a quarter of US levels in India. Advanced economies will also, generally speaking, still be easier and lower risk places to do business given their political and institutional strengths.
Hawksworth concludes: “Recent experience has underlined that relatively rapid growth is not guaranteed for emerging economies as indicated by recent problems in Russia and Brazil, for example. It requires sustained and effective investment in infrastructure and improving political, economic, legal and social institutions.
“It also requires remaining open to the free flow of technology, ideas and talented people that are the key drivers of economic catch up growth. Overdependence on natural resources could also impede long term growth in countries such as Russia, Nigeria and Saudi Arabia unless they can diversify their economies over time.
“In short, while our analysis confirms that emerging markets have huge potential, they can also be an institutional minefield, both managers and investors need to tread carefully”.
Adapted from a press release by Emma McAleavey.
Read the article online at: https://www.hydrocarbonengineering.com/refining/10022015/shift-of-economic-power-213/