The US has had the world’s largest economy for more than a century — a title it’s expected to relinquish in the coming decades. But even as US GDP is forecast to be surpassed in the years ahead, the country is projected to remain world leading when it comes to wealth and the size of its stock market, according to Goldman Sachs Research’s report “The Path to 2075.”
Demographic projections and long-term drivers of productivity can help us glimpse how the global economy may look 50 years in the future. In fact, these longer-term forecasts are, in some ways, easier than shorter estimates over a year or two, which can be derailed by booms, recessions, and other surprises. That’s because some of the key variables underpinning long-term GDP growth are slower to change, while the shorter-term volatility of the business cycle tends to average out over time, say Kevin Daly, co-head of Central & Eastern Europe, Middle East, and Africa Economics in Global Macro Research, and economist Tadas Gedminas.
“Over the very long term, the things that tend to drive the size of economies are things like population growth and long-term productivity growth, which tend to be slower-moving and less variable,” Daly says.
The sheer size of populations in some emerging markets will help propel their GDP
China and India’s populations, of more than a billion inhabitants each, matter a lot for GDP.
China’s population is about four times larger than that of the US. In economic terms, for China’s GDP to be as large as the US’s, GDP per person only needs to be about one-quarter that of the US GDP-per-person.
“It's actually not that high a bar, because China’s population is so much larger,” Daly says. Since the turn of the century, China's GDP has already risen from only 12% of US levels to around 80%. While China’s GDP growth has slowed in recent years, it’s still averaging 4.5-5% per annum.
Daly and Gedminas’s projections imply that global economic growth will be on a gradually declining path, primarily because the labor force will be expanding more slowly.
Global population growth has halved over the past 50 years, from 2% per year to less than 1%, and is expected to fall to zero by 2075.
Asia is projected to eventually account for much of the world’s GDP
Although real GDP growth has slowed in both developed and emerging markets, economic expansion in emerging nations is outstripping growth in developed countries. The chart below shows that four of the five largest global economies in 1980 were in the West. Japan was the sole Asian economy to break into the top five.
The chart also shows that that geographic picture is expected to reverse. By 2075, the US may be the only western country in the top five economies — a group that may be dominated by Asia and potentially include Nigeria.
Despite having a similar population to China, India’s GDP is significantly smaller because it took longer for the economy to set out on a trajectory of rapid growth. However in recent years, India has had GDP growth rates of 7-8% annually, outpacing China.
Developed countries — even as their share of GDP declines — will remain very rich
Importantly, GDP is only one measure of economic heft. Among other things, it doesn’t reflect a full picture of a country’s wealth or its financial strength.
China and India will have much larger populations than the US and other countries in 2075. But the chart below shows that the US is forecast to remain twice as rich as China and India in 50 years. Real GDP per capita in other developed countries will also remain much higher than their emerging market counterparts in the coming decades.
Rich countries tend to have bigger stock markets
GDP-per-capita projections can tell us a lot about world stock markets many decades from now. Goldman Sachs Research finds that there’s a statistical link between ratios of equity market capitalisation-to-GDP and GDP-per-capita.
Put another way, the chart above shows that as the level of GDP per person in the economy rises, so too does the size of the stock market relative to GDP. While it doesn’t move in a straight line, rising wealth for individuals is correlated with a bigger stock market.
The US stock market will remain world-leading — as emerging markets’ share rises
GDP-per-capita in emerging markets is expected to remain lower than in developed countries. Likewise, the chart below shows that the size of emerging-economy stock markets is forecast to lag behind the US and other developed economies.
While its share of global market cap will decline, the US equity market is projected in 2075 to still be some 60% larger than China’s, the next-biggest.
The relative importance of capital markets in emerging economies is nevertheless projected to grow, from around one-quarter of total global market cap today to more than half by 2075. The research demonstrates that while rich, developed countries will remain critical in the decades that come, it won’t be possible to capture long-term, worldwide growth trends without exposure to emerging economies and their financial markets.
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