China, India lead in Asia but new growth sources will shake up the global economy
The International Monetary Fund recently released the latest edition of the World Economic Outlook (WEO) and its global economic growth forecasts for 2020 and 2021. Policymakers use these forecasts for macroeconomic management, particularly in a turbulent period like this year.
The WEO also includes longer-term forecasts for the next five years which, though largely unnoticed when they are published, can offer valuable insights into how the global economy might evolve. Remarkable changes were visible in the global economy through to 2025. Some were expected, but there were some surprises as well.
First, how reliable are these estimates? Forecasting GDP growth rates is difficult. WEO forecasts are subject to error, though they have been found to be at least as good as others. We are, however, primarily interested in the relative size and ranking of the world’s economies, not the specific annual growth forecasts.
Our analysis finds that, for example, the WEO five-year GDP forecasts from October 2014 correlated closely with outcomes as of 2019 for the 185 countries studied. The Spearman correlation – which uses only relative rankings rather than absolute GDP numbers – is also high.
Second, assuming these longer-term forecasts are meaningful, what do they tell us about the world’s economies in 2025? We find that the world that comes out of the pandemic will be vastly different from the one after the global financial crisis, in large part because of diverging fortunes in the past decade and during the current pandemic.
China and India have been among the largest economies in the world in current US dollars for more than a decade. China is projected to remain the second-largest economy in the world by this measure, behind the United States, through to 2025.
More surprising is the projected size of China’s economy. By 2025, it will be larger than the rest of the Group of 7 – Japan, Germany, France, Britain, Italy and Canada – combined. Meanwhile, India is forecast to be the fifth-largest economy in 2025.
Also noteworthy are the huge shifts among smaller economies. Vietnam and Bangladesh are expected to be near the top end of the global ranking, larger than South Africa, Hong Kong, Singapore and any other economy in Latin America except Mexico and Brazil. Equally surprising is Ethiopia’s place in the 2025 global ranking, up 30 places from 2010.
Comparing the size of economies using current US dollars does not account for differences in purchasing power. This means it can be misleading if there are changes in exchange rates or the relative prices of goods between countries.
A method to adjust for these differences is to use purchasing power parity (PPP), which accounts for the money needed to buy a certain basket of goods in each currency rather than solely exchange rates. Constant PPP adjusts for changes in inflation and allows meaningful comparisons over time.
The changes in constant PPP terms are remarkable. By this measure, China is already the largest economy in the world, followed by the US and India. However, the steady ranking masks the spectacular gains since the end of the global financial crisis.
In 2010, for example, China was only 2.5 times larger than Japan, but it may be nearly six times larger by 2025. India has had an equally remarkable transformation. In 2010, its economy was marginally bigger than Japan’s; by 2025 it will be more than twice as large.
The rapid advancement of Bangladesh, Ethiopia and Vietnam is stunning. Vietnam and Bangladesh are expected to jump nine and 12 places in the PPP-measured ranking between 2010 and 2025, from 31st to 22nd and 38th to 26th respectively. With rapid growth driven by strong manufacturing trade and other factors, they will be about double the size of Singapore by 2025.
The single largest jump is by Ethiopia, advancing 22 places as its economy in 2025 will be three times bigger than in 2010. Ethiopia’s rapid growth has led some to call it an “economic miracle” and made it an attractive economic opportunity for international investors.
This growth is credited to increased stability and a promising environment for business, as well as government investment in infrastructure and education. There are, however, concerns about rising inequality, unequal impact of the government’s dam projects and rising government debt.
Caution is warranted in interpreting these numbers. GDP forecasts during the pandemic may be more uncertain than usual. GDP does not say everything about a country’s economic or political power, or even about its recovery from the pandemic.
Nonetheless, the world economic order is evolving. Institutions like the G7 and frameworks like the BRICS countries – Brazil, Russia, India, China and South Africa – that are based on the old rankings of economies must be re-examined.
Some have noted that the BRICS acronym no longer reflects the economic order that created it as the fortunes of these economies diverge and others emerge as the world’s new growth poles. Notwithstanding this year’s economic uncertainties, one thing is clear – there are big changes up ahead.
Laura Caron is a PhD student in economics at Columbia University. Erwin R. Tiongson is deputy director of the Global Human Development Programme and professor of the practice at Georgetown University‘s Walsh School of Foreign Service
Laura Caron and Erwin R. Tiongson