China overtakes the US – a symbol of shifting global economic power

Published on 09 May 2014 2 comments

By John Hawksworth

According to one measure of economic size, GDP at purchasing power parities (PPPs), China could overtake the US as early as 2014 according to new estimates by the World Bank published last week. This is three years earlier than projected in our own ‘World in 2050’ study in January 2013, and five years earlier than previous IMF estimates.

The reason for this earlier overtaking date is not, however, that China is growing faster than expected or that the US is growing slower. Rather it reflects new estimates of the relative price levels in the two countries, suggesting that average price levels in China, compared to the US, were comparatively lower in 2011 than had previously been estimated.

As a result, the purchasing power of Chinese national income (GDP at PPPs) is now estimated to have been around 87% of US levels in 2011, compared to previous estimates of just under 70% of US levels in that base year. Since Chinese real GDP growth has been around 7-8% per annum since 2011, with US growth only around 2-3% per annum, calculations by the FT suggest that China could narrowly overtake the US on this measure as early as 2014, with a clear gap emerging in 2015.

This is all rather technical, and if we were to use current market exchange rates, rather than PPPs, to compare GDP levels, we would  find that the Chinese economy is only around 60% of the size of the US, with takeover unlikely to happen until the late 2020s. Since businesses have to operate with market exchange rates, rather than PPPs estimated by economic statisticians, this means that the size of the Chinese market in dollar terms will still be quite a lot smaller than the US for a decade or more to come.

Furthermore, since China’s population is more than four times as great as the US, its average income levels (even measured using PPPs) are  less than a quarter of those in the US. While there are increasing numbers of wealthy individuals in China, as well as a burgeoning middle class, it’s still not a rich country and may not reach current Western levels of average incomes until the middle of the century.

These caveats are important to note, but they don’t change the bigger picture that global economic power is shifting to the East, as documented in our recent megatrends analysis. This isn’t just about China as these new GDP at PPP estimates also show that:

  • India has risen to third place in the world rankings on this measure, overtaking Germany and Japan since 2005
  • Indonesia has risen to tenth place, only narrowly behind France and the UK and ahead of Italy.

Three other emerging economies (Brazil, Russia and Mexico) also now rank in the top 12 economies in the world on this measure, driven in part by strong demand from China for their exports of oil, gas, food and metals. This is likely to continue to keep global commodity prices high and volatile for some time, though it will also stimulate new sources of supply such as shale gas and shale oil in the energy sector.

It’s also clear that several emerging economies have run into turbulence recently, which is a reminder that these are still relatively high risk places to do business. Businesses and other investors therefore need a nuanced approach to assessing these risks based on a deep understanding not just of economic factors, but also a broader range of social, political, regulatory and cultural dimensions.

This is what we aim to cover in our ESCAPE index, which was published for the first time in February. This index shows that economies like India, Brazil, Indonesia, Turkey, Mexico and Nigeria, despite their great long-term potential, still have a long way to go to get their social, political and legal institutions up to the level needed to graduate to the advanced economy club.

So, yes, global economic power is shifting, but this will not be a smooth, linear process. Businesses need to develop appropriate strategies to tackle the opportunities and the risks presented by China and other emerging markets.

John Hawksworth:
Read profile | Contact by email | Tel: 020 7213 1650


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Comments (2)

Paul Graham commented:

Thanks for posting the above article.

By some predictive scenarios, China may be on course to have a population older than present-day Japan by 2050. Whether this occurs or not, it will be interesting to see how future demographics might impact the seemingly inevitable resurgence of China as the dominant global economic power.

As one of China's current key strengths lies in it's huge workforce, if China's demographic does age as mentioned above could there be a risk that by the time it reaches current Western levels of average income the country has peaked and begins a generational decline? Interested to hear your thoughts on the likelihood of this.

John Hawksworth commented:

Paul - thanks for your comments, which highlight an important issue.

China's ageing population (as projected by the UN) is factored into the GDP growth projections in our World in 2050 report, which I refer to in the article. This contributes to a marked slowdown in Chinese growth to around 3-4% per annum in the decades after around 2020, although this would still be somewhat faster than projected growth in the US or Europe.

A rapidly ageing population will also put pressure on Chinese healthcare and pensions systems, as its government has recognised (e.g. through recent relaxation of its one child policy). As China becomes richer, I would expect significantly more money to be invested in these areas by both the government and individuals.

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