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