Money and Markets

Here's why China won't overtake the US as the largest economy anytime soon

Business Insider US
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  • We've reached peak globalisation, says Capital Economics, and emerging economies like China will suffer.
  • That means the widespread assumption that China will leapfrog the US for the title of the world's biggest economy is likely wrong.
  • "If we're right, then the world in 2050 will look very different to what the consensus expects," the economists said.
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We've reached peak globalisation, says Capital Economics - "In fact, a period of de-globalisation is increasingly likely."

The group's economists, in a note on Monday titled, "The world in 2050: where and why the consensus may be wrong," wrote that the fallout would hit emerging economies the hardest.

"A rollback of globalisation would counteract any technology-driven pick-up in productivity growth over the next decade or so," says Neil Shearing, group chief economist.

The takeaway: "The widespread assumption that China will overtake the US as the world's largest economy is likely to be proved wrong."

Market watchers have predicted the boom in China's economy as an unstoppable Goliath that will soon leapfrog the US to the No. 1 spot. Standard Chartered last year predicted that the US in 2020 would lose its crown, saying it's unlikely to ever become the most powerful economy again once it slips behind. By 2030, the bank said at the time, Asian Gross Domestic Product (GDP) will account for about 35% of global growth, up from 28% in 2018 and 20% in 2010.

That optimism has fizzled, Capital Economics said. The promise of new technologies driving productivity growth may happen, but be "unevenly spread."

"While most developed markets should start to see an improvement in productivity growth by the end of this decade, productivity growth in most emerging markets will continue to be held back by a variety of structural problems," the economists wrote. "These structural problems are most obvious in China but are also evident in other large emerging economies including Brazil, Russia and Mexico."

"If we're right, then the world in 2050 will look very different to what the consensus expects," Capital Economics said. "While Italy will lose its place in world's 10 largest economies, France, Germany and the UK will keep theirs; while India and Indonesia will shoot up the rankings, they will be the exception rather than the norm in the emerging world."

Capital Economics explained its reasoning in a note on January 10: "The process of reform and market liberalisation has stalled in many large emerging markets, and some of the previous gains from opening up to international trade could be lost, as the current wave of globalisation ends."

Using purchasing power parity exchange rates - a way of measuring prices in different regions - instead of GDP, China already is in the top spot of the world's economies, according to the IMF. The US comes second and India is third.

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