What Will Be the World’s Largest Economies By 2050?
Preparing Investors for Global Changes
China and India were the largest economies in the world before the mid-19th century due to their large populations. In those days, economic output was a function of the population rather than productivity. The Industrial Revolution added productivity to the equation, and the United States became the world’s largest economy by 1900. Innovations in manufacturing, finance, and technology helped maintain this status to the current day.
Will the United States stay in the top spot in the years to come? Economists are predicting changes as emerging markets like Vietnam increase their economic footprint. Savvy investors should keep these changes in mind to make the most of their investments.
Productivity peaked in the United States following the dot-com boom in the early 2000s and has been declining over the past decade. At the same time, globalization has accelerated the transfer of technology around the world. These trends suggest that population, rather than innovation, will once again become a key driver of economic growth.
PricewaterhouseCoopers, a multinational consulting firm based in London, published a report called "The World in 2050" in February 2017 detailing how the global economic order will change by 2050. In the report, the researchers believe that the United States economy will fall to third place—after India and China—and much of Europe will fall from the top 10 largest economies. These trends could have significant implications for international investors.
PwC expects France to no longer be a top 10 economy by 2050. It's being pushed out by Mexico, which PwC projects to be the seventh-largest economy in the world by 2050.
Top 10 Economies in 2050
The PwC "The World in 2050" report suggests that emerging markets will constitute many of the world’s top ten economies by gross domestic product (GDP) and purchasing power parity (PPP) by 2050. The table below shows the International Monetary Fund (IMF) estimates for 2016 and PwC’s projections for 2050 to demonstrate these changes.
The PwC report also looks at the fastest growing economies between 2016 and 2050, which include frontier markets by today’s definition.
Overall, PwC believes that the global economy will double in size by 2042, growing at an average rate of 2.6% between 2016 and 2050. These growth rates will be primarily driven by emerging market countries, including Brazil, China, India, Indonesia, Mexico, Russia, and Turkey. These countries are expected to grow at an above-average 3.5% rate, compared to just a 1.6% average rate for Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
Investors Home-Country Bias
Most investors tend to be overweight in investments within their own country. For example, Vanguard found that U.S. investors held approximately 1.5 times more in U.S. stocks than the U.S. market capitalization, which was 55.1% as of September 30, 2018. Financial theory suggests that investors should allocate more to foreign securities, which helps increase diversification and long-term risk-adjusted returns.
The home-country bias could become even more problematic as the United States accounts for less and less of global market capitalization. If U.S. investors maintain the same allocations to foreign investments, despite a drop in the U.S. share of global market capitalization, they will have a greater home-country bias. Investors should plan to allocate more to emerging markets over the coming years to avoid this costly bias.
The United States has enjoyed a leadership role in the global economy for many years, but those dynamics could begin to change with the rise of emerging markets. For example, the U.S. dollar has long been the world’s most important reserve currency, but the Chinese yuan could overtake the dollar over the coming years. This could have a negative impact on the valuation of the U.S. dollar over time and potentially destabilize the global economy if the yuan is volatile.
China, Russia, and many other emerging markets have also taken an increasingly large role in global conversations. This could present a challenge for the United States and Europe over the coming years, particularly when it comes to trade issues or global conflicts. These dynamics could alter the current risk profile of the global markets by potentially increasing geopolitical risks as power struggles play out between countries over time.
The Bottom Line
The United States has been the world’s largest economy for a long time, but those dynamics are quickly changing as China, India, and other emerging markets gain momentum. Investors should be aware of these global changes and position their portfolio to avoid home-country bias through increased international diversification. Diversification also helps with hedging against potential geopolitical risks that may arise from these power struggles.