There’s room for competition at the top.
Samuel Rines, June 25, 2016
Will today’s five largest economies—China, the United States, India, Japan and Germany—maintain their places between now and 2030? Or will see a reshuffling?
China has already passed the United States in terms of Purchasing Power Parity Gross Domestic Product (PPP GDP)—a method of measuring the relative purchasing power of a nation used throughout this piece. Granted, this is only one measure of wealth, and much of China remains poor, but it illustrates that measurement matters. By other measures, such as current dollar GDP, the United States is still the largest economy, and it is likely that U.S. economic dominance will continue.
The United States has a few advantages in remaining a top economic power. Unlike China, the United States has already pivoted from manufacturing toward services, thereby reducing its reliance on exports for growth. And the ability to hydraulically fracture lessens the United States’ reliance on global energy markets and Middle Eastern stability, something that was not true a decade ago.
For its part, China will certainly remain a top-five economy, but it will not overtake the United States in terms of GDP per capita—a measure of wealth versus size. The two primary headwinds for China maintaining are the need to reform its banking system, and the pivot to a more consumer-driven society. Neither is simple to address on its own, never mind in tandem.
China’s banking system is laden with nonperforming loans. The extent of the issue is unknowable, due to the opacity of the institutions, but the suspicion is that the need to recapitalize and expunge the balance sheets is imminent and stark. Tackling, and ultimately solving, the issue will consume resources that would be better used to transition the economy from infrastructure building and investment to services.
By 2030, China may find itself in a similar position to where Japan is today—a significant global economic player going nowhere quickly while aging rapidly. Unlike Japan, China will be a particularly poor position to pause its growth, given that it will be at best a middle-income nation.
This so-called “middle-income trap” is unforgiving, but the middle-income trap is not a middle-income decline. It is rare for nations to fall back significantly, which is what it would take for China, or the United States, to fall out of the top five. Therefore, the battle for spots in the top five will be fought from third to fifth place, positions currently held by India, Japan and Germany. The captivating question is who will fall out, and who will rise to replace them.
Using the International Monetary Fund’s PPP GDP figures, the United States and China have economies that are more than double that of third-place India. Nonetheless, it will take a serious twist of fate for India to be replaced in the top five. India’s tailwinds are numerous, its headwinds are manageable and, unlike most the rest of the world, India is a relatively young country. It also has the tailwind of needing to build the necessary infrastructure to be a twenty-first-century economy. And, at less than 70 percent according to the IMF, India does not have the government-debt-to-GDP burden that hinders the growth of many countries (meaning that there is some room for fiscal policies to encourage growth).