London, 7 Jan 2011 — The global financial crisis has accelerated the shift in economic power to emerging economies, says a report published by PwC today.
This is one of the conclusions from the latest in the series of PwC’s ‘The World in 2050’ reports. Measuring GDP at purchasing power parities (PPPs) – which corrects for the fact that price levels tend to be lower in emerging economies – the analysis shows that the E7 emerging economies (China, India, Brazil, Russia, Mexico, Indonesia and Turkey) are likely to overtake the G7 economies (US, Japan, Germany, UK, France, Italy and Canada) before 2020.
If instead we use GDP at market exchange rates (MERs), then the shift in the economic world order is slower but equally inexorable, with the E7 projected to overtake the G7 around 2032. China would also overtake the US in that same year to become the biggest economy in the world based on GDP at market exchange rates, although on a PPP basis this would be likely to occur before 2020. This is even allowing for some slowing of China’s growth rate over time due to its one child policy and the fact that, as it catches up with the US, it must rely more on innovation than imitation to sustain further growth.
The table below summarises some of the key estimated overtaking dates for the E7 economies relative to the G7. We can see that these always occur later when using market exchange rates than PPPs, but even on an MER basis there is an inexorable process of the new world order replacing the old over the next four decades. While precise overtaking dates are clearly subject to many uncertainties, and some emerging countries may fail to realise their full growth potential, the general pattern should be robust assuming no catastrophic political or environmental shocks that permanently throw the world off its current economic development path.
The contenders Estimated overtaking dates Estimated overtaking dates based on GDP at PPPs based on GDP at MERs
E7 vs G7 2017 2032
China vs US 2018 2032
India vs Japan 2011 2028
Russia vs Germany 2014 2042
Brazil vs UK 2013 2023
Mexico vs France 2028 2046
Indonesia vs Italy 2030 2039
Turkey vs Canada 2020 2035
Source: PwC model estimates (see Table 3 in full report for all estimated E7 vs G7 overtaking dates up to 2050)
The most significant increase in its share of world GDP is actually projected for India rather than China. In 2009 India’s share of world GDP measured at MERs was just 2%. By 2050 this share could grow to around 13%. India could overtake Japan as early as 2011 based on GDP at PPPs and could even overtake the US by 2050 on this basis. India’s progress up the GDP league table will be much slower using market exchange rates because its domestic price levels are still far below G7 levels at present, but even based on GDP at MERs it should have overtaken Japan by 2030 and be close to catching up with the US by 2050.
The analysis finds that Australia and Argentina may be relegated from the ranks of the largest G20 economies by 2050, while Vietnam and Nigeria have the potential to join this list. Indonesia could rise from the sixteenth biggest economy in PPP terms in 2009 to the eighth biggest by 2050, overtaking not just Italy (as shown in the table above) but also France, the UK and Germany over the next 40 years. Depending on the measure used, the UK would only narrowly remain in the top ten in 2050 with a ranking of 9th place based on GDP at market exchange rates, or 10th based on GDP at PPPs.
John Hawksworth, chief economist at PwC, said:
“In many ways the renewed dominance by 2050 of China and India, with their much larger populations, is a return to the historical norm prior to the Industrial Revolution of the late 18th and 19th centuries that caused a shift in global economic power from Asia to Western Europe and the US – this temporary shift in power is now going into reverse.
“This changing world order poses both challenges and opportunities for businesses in the current advanced economies, including the UK. On the one hand, competition from emerging market multinationals will increase steadily over time and the latter will move up the value chain in manufacturing and expand strongly in areas like banking where the global financial crisis has hit the West harder than the East.
“At the same time, rapid growth in consumer markets in the major emerging economies associated with a fast growing middle class, will provide great new opportunities for Western companies that can establish themselves in these markets. This applies not least to the UK, which currently sells only around 7% of its exports to the BRICs (including Hong Kong as part of China), about the same as it exports to Ireland at present and notably lower than the corresponding 10% of German exports going to the BRICs. If the UK is not to be playing in the slow lane of history for the next 40 years, then it needs to find a way to break into these fast-growing emerging markets on a much larger scale than achieved so far”.
1. Comparing the size of economies over time requires their GDP to be translated from domestic currencies to a common currency, which in line with standard conventions we adopt here as the US dollar. One approach is just to use market exchange rates (MERs) in this translation, but these can be very volatile and, more importantly, tend to understate the relative volume of goods and services used in emerging economies whose domestic price levels tend to be significantly lower than in the current advanced economies due in particular to lower wage rates (e.g. a haircut is generally a lot cheaper in Beijing than an equivalent service in London or New York). Economists therefore often prefer to use purchasing power parities (PPPs) in order to make such international comparisons, particularly when assessing relative living standards or projecting forward physical quantities such as energy consumption or carbon emissions. PPPs are the exchange rates that would equalize the cost of a representative basket of goods and services in each country, as calculated here for our 2009 base year by the World Bank based on their 2005 International Comparison of Prices (ICP) joint research project with the IMF, UN, OECD and Eurostat. For later years we assume that PPPs remain constant in real terms (i.e. after adjusting for relative inflation rates across countries).
2. GDP at PPPs provides a better measure of the relative volume of goods and services produced in each economy and (on a per capita basis) of relative living standards. GDP at MERs, however, remains relevant for many business purposes where the focus is on the relative value of different markets, but in projecting this forward it is important to allow, as we have done in this study, for the tendency of market exchange rates in emerging economies to appreciate over time in real terms (through some combination of nominal currency appreciation and/or relatively high domestic price inflation) for emerging economies with relatively high productivity growth rates. Over time, this means that MERs will tend to converge on PPPs, although this is likely to be a very gradual process that is still not fully complete even by 2050 according to our analysis in this study.
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