The world economy is projected to grow at an average rate of just over 3 per cent per annum from 2011 to 2050, doubling in size by 2032 and nearly doubling again by 2050.
China is projected to overtake the US as the largest economy by 2017 in purchasing power parity (PPP) terms and by 2027 in market exchange rate terms. India should become the third ‘global economic giant’ by 2050, a long way ahead of Brazil, which we expect to move up to 4th place ahead of Japan. Russia could overtake Germany to become the largest European economy before 2020 in PPP terms and by around 2035 at market exchange rates. Emerging economies such as Mexico and Indonesia could be larger than the UK and France by 2050, and Turkey larger than Italy. Outside the G20, Vietnam, Malaysia and Nigeria all have strong long-term growth potential, while Poland should comfortably outpace the large Western European economies for the next couple of decades.
Projections to 2050
The latest Pricewaterhouse Cooper (PwC) report updates their long-term global economic growth projections, which were last published in January 2011. These are based on a PwC model that takes account of projected trends in demographics, capital investment, education levels and technological progress. A chart shows estimated relative GDP growth rates for the 24 economies in the study over the whole 2011-50 period. The report says that we can see that emerging economies tend to grow at 4 per cent per annum or more, while advanced economies grow at around 2 per cent or less we will continue to live in a two-speed world economy for some decades to come as a catch up process continues.
The changing league table of world GDP at PPPs is shown in a table in which selected countries are marked in bold to highlight notable changes in rankings over time.
However, even in 2050 average income per capita will still be significantly higher in the advanced economies than in the emerging economies the current income gap is just too large to bridge fully over this period. In contrast to recent arguments by Professor Robert Gordon and some other commentators, we do not expect a significant slowdown in the global pace of technical progress given the scope for further major advances in areas like ICT, biotechnology and nanotechnology, although emerging economies like China and India will play an increasing role in these developments in future decades. This will further fuel their catch-up process with the more sluggish advanced economies.
Opportunities and challenges for business
The projected long-term growth trends pose many opportunities and challenges for businesses in the UK and other Western economies. China, India, Brazil and the other emerging markets highlighted in the study will become not just low cost production locations but also increasingly large consumer markets. At a time when trend annual growth is projected to be no more than around 2 per cent in the advanced economies, companies seeking growth will need to look increasingly to these emerging markets. At the same time, such markets can be challenging places to do business. It will be important to understand and adapt to local rules, regulations and customs. The right entry strategy and, where appropriate, the right joint venture partner(s) will be crucial, as will good relations with local government and regulatory bodies. In some cases, the optimal production locations may not be the same as the largest consumer markets (e.g. investing in Malaysia, Indonesia or Vietnam as a gateway to China or India, or in Poland as a gateway to Russia).
Energy use and climate change: too late for 2 degrees?
There are also important challenges for governments, not least regarding natural resource constraints such as those relating to energy use and climate change. As our analysis shows, a ‘business as usual’ approach based on our GDP growth projections could see global warming of 6˚C or more in the long run, while the UN’s 2˚C objective seems increasingly out of reach given the lack of progress on decarbonisation since 2000. A more plausible and affordable ‘gradual greening’ scenario might see decarbonisation at a rate sufficient to broadly offset the effects on emissions of economic growth, so leaving total global carbon emissions in 2050 at similar levels to today. But even this scenario would still be consistent with 4 degrees of global warming in the long run – it may already be too late for 2 degrees. Such climate change will in itself create new opportunities for business, however, for example in mitigating the risks from severe weather events in parallel with developing new greener technologies.
Relative size of economies
A chart shows that:
- The E7 countries could overtake the G7 countries as early as 2017 in PPP terms. This rapid convergence between these two groups of economies has been accelerated by the fact that the developed countries have been much slower to recover from the recession of 2008-9, whilst the emerging economies have been relatively insulated despite some slowdown in 2011-12.
- The gap between the E7 and G7 countries is projected to continue to widen after 2017 – the E7 countries could potentially be around 75 per cent larger than the G7 countries by the end of 2050 in PPP terms.
Another chart which shows the growth paths of the E7 and the G7 in MER terms, paints a similar picture, with the exception that the year in which the E7 overtakes the G7 is pushed back to around 2030, rather than 2017. This is because price levels in the E7 economies are, on average, still well below G7 levels when compared using current market exchange rates – in other words, MERs in the E7 economies are well below purchasing power parity (PPP) levels.
This is a commonly observed phenomenon for emerging economies, but past experience with previously fastgrowing countries such as Japan in the 1960s to 1980s or South Korea in the 1970s to 1990s suggests that MERs do tend to converge gradually with PPP rates as economic development continues. This could occur either through nominal exchange rate appreciation, or through relatively high domestic price inflation in the emerging economies, but in either case the result is likely to be long-run real currency appreciation. This effect5, based on an econometric equation estimated from past data, is incorporated in our model and forms the basis for our projections of GDP in MER terms as shown in Chart 4 above.
However, these real exchange rate projections are highly uncertain in practice, so we put more weight on the PPP results in the rest of this section, with further details on the MER results being included in Appendix B given that these are relevant for many business applications.
China, US and India likely to be dominant global economies by 2050
Much of the growth that we project to take place within the E7 economies will be driven by China and India. By 2050, China, the US and India are likely to be by far the three largest economies in the world.
Our model suggests that China could overtake the US by 2017 in PPP terms, and by around 2027 in MER terms. The MER estimate is, however, subject to our assumptions on the pace of convergence of China’s MER with its estimated PPP exchange rate, which we consider to be plausible but nonetheless subject to significant uncertainty.
Projected GDP growth paths of China and the US
China’s growth rate is expected to meet the government’s new 7 per cent target for the current decade, but will cool down progressively during the period 2021 – 2050 as its economy matures. A rapidly aging population and rising real labour costs are expected to see China transition from being an export-orientated economy to more of a consumption driven economy. Western companies are also likely see a change in the way they do business in the region – rising costs will mean that many off-shored jobs are likely to exit China over time for other cheaper economies such as Vietnam and Indonesia, whilst Chinese exporters will find themselves competing more on the basis of quality rather than price in their key US and EU export markets.
Source : The BRICs and beyond: prospects, challenges and opportunities : Report by Pricewaterhouse Cooper.