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Euromonitor International wrong to see China overtaking the US as world’s largest economy by 2017

Posted on 04 March 2013 with 3 comments from readers

Macroeconomic forecasting is notoriously difficult. ArabianMoney recalls how Japan was supposed to ovetake the US economy in the 90s. We just about remember the end of the dollar forecasts of the 1970s. But are the Euromonitor International predictions this month for real?

It has China set to become the world’s largest economy in terms of GDP in PPP terms by 2020 and India roaring up to third slot! Russia will overtake Germany as the fifth largest economy by that date…

Can this forecast be correct? We doubt it, such forecasts are usually wrong. They take the recent past and project it forward. But reality seldom moves in a straight line. It is the reason why economists make such lousy investment advisers.

US collapse?

For China to top the US in 2017 there has to be stagnation or decline in the US economy coupled with continued high growth in China. Euromonitor admits ‘rising labour costs, pollution, a potential real estate bubble and rapid ageing arising from the government’s one child policy’ are problems for China going forward.

We would add a stalling global economy just cannot be good news for the world’s largest exporter. There’s the rub. China cannot rise above us if we are falling in a global recession. We would also not underestimate the US economy’s capacity for self-renewal with the cheap energy of shale gas, for example.

Economies move in cycles, not straight line projections. You might have thought economists would have spotted that by now. Of course they have, but as they cannot agree on the cycles they stick with the straight lines. So you get utter nonsense like India as a great economic power.

You cannot get to the top of the economic league table simply by expanding your population. That is not the way China did it. If you over grow your population then you can end up with a Malthusian crisis and declining per capita GDP. India’s bureaucratic democracy, infrastructure and educational system will simply never support a high income economy.

Russia rising?

That said sheer population might well help Russia to overtake Germany in the economic league table. Russia is already a middle income country thanks to its huge hydrocarbon revenues and with twice the population of Germany only a relatively small advance is needed to tip total GDP in its favor.

However, probably what renders these forecasts completely unreliable is that they cannot discount major national crises. For example, the debt ridden Japanese economy looks very vulnerable to a bond crisis, falling exports and internal financial meltdown.

By contrast Russia and China hold huge financial reserves and debts are far lower than in Japan or the US. Then again India most likely holds the most gold of any country and if the gold price roars ahead in an era of high inflation that is another economic wild card.

ArabianMoney’s reckoning for the top nations in 2020 would be, respectively: USA, China, Russsia, Germany and Japan. The advance of Russia would be the biggest surprise. China and India are the past shock, not the future.

Posted on 04 March 2013 Categories: Banking & Finance, Bond Markets, Global Economics, Oil & Gas, US Stocks

3 Comments posted by readers:

Comment by Vectra - 10 March 2013

disagree with author,countries huge population will drive the nation economy forward it doesn’t matter how much per capita income there may be.China and India are not the past shock but they are futures,there growth may have declined but still they are growing but soon they will bounce back.I cannot understand how you come to the conclusionHow a country that is not growing like at 0% growth like france or -ve growth germany or marginal growth like 1-2% US cannot expect other countries growing at 6%like india and 8% china cannot over take in this growth rate in long run.Howevr India and China’s growth willbounce back to 8% and 10% respectively in 2-3 yrs.So when there is such a huge gap in growth rate figure then it is natural prediction that if US and others grows at this pace and India and China grows at this pace that it is possible they can overtake in future.

Ed Note: Emerging market growth always tops out at some point and then they shift to ‘normal’ levels of global growth. If China and India reach their limit relatively soon then per capita income will never catch up with the developed nations. Feeding a big population is a major constraint. Ask anybody with a large family!

Comment by Media - 11 April 2013

As the article in ArabianMoney rightly alludes to, macroeconomic forecasting is notoriously difficult. Euromonitor’s “Top 5 Largest Economies in 2020” article was written based on our current projections, which essentially highlight the global shift in power to emerging markets, which is one of the defining trends of our times. These forecasts are also in line with major organisations including the IMF and OECD. The first thing to note is that our article is based on figures in Purchasing Power Parity terms. If we look at our forecasts for the world’s largest economies in real US$ terms, Euromonitor expects that the top 5 largest economies in 2020 would be: 1. The USA 2. China 3. Japan 4. Germany 5. India. We used PPP as this is a method of measuring the relative purchasing power of different countries’ currencies over the same types of goods and services, thus allowing a more accurate comparison of living standards. The second thing to note is that we are talking about the relative size of economies rather than purchasing power. Emerging markets on a per capita basis will lag behind developed economies for some time and this is where advanced economies can retain relative advantages in global competitiveness. Finally, we agree that demographics should not be the only indicator used to determine economic growth but in economies which are still benefitting from their demographic dividend, this can be an advantage to boosting economic growth at a time when many countries around the world are battling the effects of ageing populations and shrinking labour forces. However, young and growing populations are only an advantage if the government or the pace of economic growth/development and reform can keep up with the pace of job demand, otherwise it can equally end up being a source of problems and discontent, as seen most recently in the Arab Spring. The ArabianMoney article mentions the fact that these forecasts “cannot discount major national crises” and we would like to point out that our original piece did not seek to present scenario forecasts. It is for this reason that we continuously review and update our macroeconomic forecasts, taking into account the latest monthly and quarterly indicators, to ensure we present the most accurate projections at the time of writing.

Comment by clarksonsinusa - 10 January 2014

The 21st century will be about innovation,automation,and cheap,clean, abundit shale gas to power it all…The 21st century will be the American century…

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