A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK.
Despite worries about activity in the US and Europe, the global economy has not stopped growing. The IMF forecasts that the global economy will expand by almost 20% over the next five years, compared to its size last year. (This measure of GDP uses Purchasing Power Parity or PPP – currency exchange rates based on spending power in different economies. Using market exchange rates, which understate spending power, the global economy is expected to expand by 16% over this period).
This 20% global growth compares with a forecast 5.4% increase in the world’s population over the next five years. So despite an increasing world population, average GDP per capita is forecast to grow by nearly 14% by 2028 with the strongest gains being seen in emerging and developing economies.
This represents the next stage of a process of economic expansion that has been underway since the Industrial Revolution. (Of course, what is far more recent is the understanding of the connection between growth and carbon emissions, a realisation that is transforming economic policy – but has yet to arrest the rapid growth of emissions).
Growth has been in short supply in many European countries, especially the UK, for over a decade. But for all the angst about declining productivity growth in the West the dominant global story remains one of growth, not stagnation.
China has been the engine of global growth for the last 20 years, making an outsize contribution to the doubling in size of the global economy over this period.
Despite a shrinking population and slowing growth, China’s sheer scale, some 1.4bn people, combined with a growth rate of around 4.0% means that the Chinese economy is likely to expand by a quarter by 2028.
Such growth in the world’s largest economy would see China accounting for 27% of global growth between 2022 to 2028. (Chinese GDP exceeds America’s when using PPP. On market exchange rates the US is the world’s largest economy and is set to remain so in the medium term).
If you Google the term “US decline” you will find plenty of articles arguing that America is a power in economic decline. The opponents of such a view can take some comfort from the fact that the IMF reckons the US will be the fastest growing G7 country over the medium-term despite the fact that it is already richer on a per capita basis than any other G7 country.
A recent article in The Economist deployed a range of data to argue against the declinist view of the US. On the question of living standards, one of the most remarkable ones was that “a trucker in Oklahoma can earn more than a doctor in Portugal”. Less graphical, but equally striking, is the fact that GDP per capita is about 20% higher on a PPP basis in the US than in Germany according to the IMF.
The IMF forecasts that the US will account for 20% of global growth up to 2028, in part because its population is forecast to increase by 13m between 2022 to 2028.
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As China’s growth rate slows we are likely to hear more about growth elsewhere in Asia. The Indian economy is now more populous than China’s and its growth rate is forecast to eclipse China’s over the next five years. Growth elsewhere in Asia, in Vietnam, Bangladesh, Indonesia, the Philippines, Malaysia and Cambodia also looks set to outpace Chinese growth. Vietnam and Bangladesh are growing particularly quickly. The IMF forecasts their economies are likely to expand by almost 50% between 2022 and 2028.
These countries have benefitted from companies looking to shift their supply chains outside of China. For many of these countries, their labour costs are now far below those seen in the manufacturing hubs of China.
South Korea is perhaps the clearest example of a development success story. As recently as 1980, South Korean GDP per capita was just 20% of that of the UK. By 2024, the IMF expects South Korean GDP per capita to exceed the UK’s. Yet South Korea is still classified by some as an emerging market, a description that now seems hopelessly out of date.
Many of the fastest growing countries over the next five years are likely to be in sub-Saharan Africa. Uganda, Tanzania, Ethiopia, Rwanda, Kenya and Senegal are just some of the African countries which the IMF sees growing by an average of over 5.0% a year between 2022 and 2028.
A number of advanced economies including notably Japan, Italy and Germany are predicted to see very slow economic growth rates over the coming years, in part as a result of ageing populations. For Italy, Japan and Germany, their populations are forecast to fall in the next 5 years.
For all the problems of the West, the global economy is continuing to grow and that growth is helping improve the human condition. The number of people living in extreme poverty has fallen from almost 2bn to 0.66bn since 1992. This achievement is all the more remarkable when one considers that the world’s population has expanded by almost 3.5 billion in this period.
The poverty-reducing effects of growth are clear. But so, too, are its impacts on the environment and world temperatures. The quest for carbon-free growth is arguably the greatest economic challenge of this century.
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