Thursday, November 15, 2012

China's economy overtakes Eurozone in 2012 and US in 2016; India poised to surpass Japan

On the basis of 2005 purchasing power parities (PPPs), China's economy is projected to surpass the Eurozone in 2012 and the United States by 2016, to become the largest economy in the world, and India is about now surpassing Japan and is expected to surpass the Eurozone in about 20 years. Per capita GDP (gross domestic product) or income is a different story and as regard timing, John Kenneth Galbraith, the late American economist, once said: "The only function of economic forecasting is to make astrology look respectable."

The Paris-based Organisation for Economic Co-operation and Development (OECD) says global GDP will grow by 3% a year over the next 50 years, but there will be large variations between countries and regions. By 2025, it says the combined GDP of China and India will be bigger than that of France, Germany, Italy, Japan, UK, US and Canada (the G7 or Group of Seven) put together. Asa Johansson, senior economist at the OECD, said: "It is quite a shift in the balance of economic power we are going to see in the future."

The faster growth rates of China and India imply that their combined GDP will by 2060 - - more than 1½ times larger than the G7, whereas in 2010 China and India accounted for less than one-half of G7 GDP. Strikingly, the combined GDP of these two countries will be larger than that of the entire OECD area, based on today’s 34-mainly developed country membership, in 2060, while it currently amounts to only one-third of it.

Demographic changes, including ageing, and economic convergence will bring about large shifts in the composition of global GDP.

The OECD says the working hypothesis underlying this note is that the current crisis has only reduced the level of trend GDP, currently and over the next few years, and has had no permanent effects on trend growth rates. Moreover, in keeping with the long-term focus, possible repercussions on trend output of prolonged period of deficient demand are ignored. Thus, the resulting long-term scenario provides a relatively benign longterm outlook for the global economy. Indeed, a number of other factors are also ignored, including the possibility of disorderly debt defaults, trade disruptions and possible bottlenecks to growth due to an unsustainable use of natural resources and services from the environment.

The OECD says changes in shares of global GDP will be matched by a tendency of GDP per capita to converge between advanced and emerging economies, although substantial gaps in living standards will remain.

Over the next half century, the unweighted average of GDP per capita (in 2005 PPP terms), is predicted to grow by roughly 3% annually in the non-OECD area, as against 1.7% in the OECD area. As a result, GDP per capita in the poorest economies (in 2011) more than quadruples (in 2005 PPP terms), whereas it only doubles in the richest economies. China and India will experience more than a seven-fold increase of their income per capita by 2060. The extent of the catch-up is more pronounced in China reflecting the momentum of particularly strong productivity growth and rising capital intensity over the last decade. This will bring China 25% above the current (2011) income level of the United States, while income per capita in India will reach only around half the current US level.

Despite this fast growth among “catching-up” countries as differences in productivity and skills are reduced, remaining differences in these factors still explain a significant share of gaps in living standards in 2060. In particular, large differences in average education will persist in the long term, as such averages reflect education levels across the whole adult population, and therefore evolve slowly over time so that gaps with advanced economies close more slowly than productivity gaps. This does, however, suggest that major educational reforms which facilitate more rapid advances in average educational attainment could be an important policy lever for achieving a faster catch-up in living standards among developing countries – indeed recent OECD analysis identifies education reforms as among the highest priorities for structural reform in Brazil, China, India and Indonesia.