The world’s biggest economy

The world’s biggest economy

The Economist’s coverage of when China will exceed America as the world’s biggest economy reinforces my thesis that emerging markets will grow faster than the S&P 500 on a long-term basis – the question is just whether that event will occur in 2019 or 2022, based upon inputting certain variables.

“And America will only really be eclipsed when China’s GDP outstrips it in plain dollar terms, converted at market exchange rates.”

“Since by that reckoning China’s GDP is currently only two-fifths the size of America’s, that day may still seem distant. But it is getting closer. When Goldman Sachs made its first forecasts for the BRIC economies (Brazil, Russia, India and China) in 2003, it predicted that China would overtake America in 2041. Now it says 2027. In November Standard Chartered forecast that it will happen by 2020. [italics added] This partly reflects the impact of the financial crisis. In the third quarter of 2010 America’s real GDP was still below its level in December 2007; China’s GDP grew by 28% over the same period.”

“If real GDP in China and America continued to grow at the same annual average pace as over the past ten years (10.5% and 1.7% respectively) and nothing else changed, China’s GDP would overtake America’s in 2022. [italics added] But crude extrapolation of the past is a poor predictor of the future: recall the forecasts in the mid-1980s that Japan was set to become the world’s largest economy. China’s growth rate is bound to slow in coming years as its working-age population starts to shrink and productivity growth declines.”

“Our best guess is that annual real GDP growth over the next decade averages 7.75% in China and 2.5% in America, inflation rates average 4% and 1.5%, and the yuan appreciates by 3% a year. If so, then China would overtake America in 2019 (see chart).” [italics added]