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Press Release
Date
00.01 GMT 7 January 2011
Contact
Simon Reed, PwC
Tel: +44 207 804 2836
e-mail: [email protected]
Pages
3
Global financial crisis accelerates shift in economic power to emerging
economies
The global financial crisis has accelerated the shift in economic power to emerging economies, says a
report published by PwC today.
This is one of the conclusions from the latest in the series of PwC’s ‘The World in 2050’ reports.
Measuring GDP at purchasing power parities (PPPs) - which corrects for the fact that price levels tend
to be lower in emerging economies - the analysis shows that the E7 emerging economies (China, India,
Brazil, Russia, Mexico, Indonesia and Turkey) are likely to overtake the G7 economies (US, Japan,
Germany, UK, France, Italy and Canada) before 2020, as illustrated in the chart below.
When will the E7 economies overtake the G7?
160000
140000
$bn at constant 2009 dollars
120000
100000
80000
E7 overtakes G7 in 2017
based on GDP at PPPs
60000
40000
E7 overtakes G7 in 2032
based on GDP at MERs
20000
20
49
20
47
20
45
20
43
20
41
20
39
20
37
20
35
20
33
20
31
20
29
20
27
20
25
20
23
20
21
20
19
20
17
20
15
20
13
20
11
20
09
0
Source: World Bank for 2009 data, PwC model projections to 2050
G7 GDP at MERs
E7 GDP at MERs
G7 GDP at PPPs
E7 GDP at PPPs
If instead we use GDP at market exchange rates (MERs), then the shift in the economic world order is
slower but equally inexorable, with the E7 projected to overtake the G7 around 2032. China would also
overtake the US in that same year to become the biggest economy in the world based on GDP at
PricewaterhouseCoopers LLP, 1 Embankment Place. London, WC2N 6RH
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market exchange rates, although on a PPP basis this would be likely to occur before 2020. This is even
allowing for some slowing of China’s growth rate over time due to its one child policy and the fact that,
as it catches up with the US, it must rely more on innovation than imitation to sustain further growth.
The table below summarises some of the key estimated overtaking dates for the E7 economies relative
to the G7. We can see that these always occur later when using market exchange rates than PPPs, but
even on an MER basis there is an inexorable process of the new world order replacing the old over the
next four decades. While precise overtaking dates are clearly subject to many uncertainties, and some
emerging countries may fail to realise their full growth potential, the general pattern should be robust
assuming no catastrophic political or environmental shocks that permanently throw the world off its
current economic development path.
The contenders
E7 vs G7
China vs US
India vs Japan
Russia vs Germany
Brazil vs UK
Mexico vs France
Indonesia vs Italy
Turkey vs Canada
Estimated overtaking dates
based on GDP at PPPs
2017
2018
2011
2014
2013
2028
2030
2020
Estimated overtaking dates
based on GDP at MERs
2032
2032
2028
2042
2023
2046
2039
2035
Source: PwC model estimates (see Table 3 in full report for all estimated E7 vs G7 overtaking dates up to 2050)
The most significant increase in its share of world GDP is actually projected for India rather than
China. In 2009 India’s share of world GDP measured at MERs was just 2%. By 2050 this share could
grow to around 13%. India could overtake Japan as early as 2011 based on GDP at PPPs and could even
overtake the US by 2050 on this basis. India’s progress up the GDP league table will be much slower
using market exchange rates because its domestic price levels are still far below G7 levels at present,
but even based on GDP at MERs it should have overtaken Japan by 2030 and be close to catching up
with the US by 2050.
The analysis finds that Australia and Argentina may be relegated from the ranks of the largest G20
economies by 2050, while Vietnam and Nigeria have the potential to join this list. Indonesia could rise
from the sixteenth biggest economy in PPP terms in 2009 to the eighth biggest by 2050, overtaking
not just Italy (as shown in the table above) but also France, the UK and Germany over the next 40
years. Depending on the measure used, the UK would only narrowly remain in the top ten in 2050 with
a ranking of 9th place based on GDP at market exchange rates, or 10th based on GDP at PPPs.
John Hawksworth, chief economist at PwC, said:
“In many ways the renewed dominance by 2050 of China and India, with their much larger
populations, is a return to the historical norm prior to the Industrial Revolution of the late 18 th
and 19th centuries that caused a shift in global economic power from Asia to Western Europe
and the US – this temporary shift in power is now going into reverse.
“This changing world order poses both challenges and opportunities for businesses in the
current advanced economies, including the UK. On the one hand, competition from emerging
market multinationals will increase steadily over time and the latter will move up the value
chain in manufacturing and expand strongly in areas like banking where the global financial
crisis has hit the West harder than the East.
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“At the same time, rapid growth in consumer markets in the major emerging economies
associated with a fast growing middle class, will provide great new opportunities for Western
companies that can establish themselves in these markets. This applies not least to the UK,
which currently sells only around 7% of its exports to the BRICs (including Hong Kong as part
of China), about the same as it exports to Ireland at present and notably lower than the
corresponding 10% of German exports going to the BRICs. If the UK is not to be playing in the
slow lane of history for the next 40 years, then it needs to find a way to break into these fastgrowing emerging markets on a much larger scale than achieved so far”.
Notes
1. Comparing the size of economies over time requires their GDP to be translated from domestic
currencies to a common currency, which in line with standard conventions we adopt here as the US
dollar. One approach is just to use market exchange rates (MERs) in this translation, but these can be
very volatile and, more importantly, tend to understate the relative volume of goods and services used
in emerging economies whose domestic price levels tend to be significantly lower than in the current
advanced economies due in particular to lower wage rates (e.g. a haircut is generally a lot cheaper in
Beijing than an equivalent service in London or New York). Economists therefore often prefer to use
purchasing power parities (PPPs) in order to make such international comparisons, particularly when
assessing relative living standards or projecting forward physical quantities such as energy
consumption or carbon emissions. PPPs are the exchange rates that would equalize the cost of a
representative basket of goods and services in each country, as calculated here for our 2009 base year
by the World Bank based on their 2005 International Comparison of Prices (ICP) joint research
project with the IMF, UN, OECD and Eurostat. For later years we assume that PPPs remain constant
in real terms (i.e. after adjusting for relative inflation rates across countries).
2. GDP at PPPs provides a better measure of the relative volume of goods and services produced in
each economy and (on a per capita basis) of relative living standards. GDP at MERs, however, remains
relevant for many business purposes where the focus is on the relative value of different markets, but
in projecting this forward it is important to allow, as we have done in this study, for the tendency of
market exchange rates in emerging economies to appreciate over time in real terms (through some
combination of nominal currency appreciation and/or relatively high domestic price inflation) for
emerging economies with relatively high productivity growth rates. Over time, this means that MERs
will tend to converge on PPPs, although this is likely to be a very gradual process that is still not fully
complete even by 2050 according to our analysis in this study.
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