Predictions for the Emerging Markets

The world’s economies will line up much differently in 45 years, according to the PWC model:

PWC offers the following observations on this data:

• China will be adversely impacted by its one-child policy and rapidly aging population.  India, by contrast, will benefit from a rapidly growing working age population.  Nonetheless, China will overtake the US in 2025 and become the world’s largest economy, surpassing the US by 30% in 2050.  India’s economy will be 90% of the size of the US in 2050.

• Education and productivity levels in China are lower than in India, but are expected to catch up over time.   Education and productivity in India will catch up with OECD levels, provided that India can institute a framework to overcome barriers such as the low education of women in rural areas.

• China’s growth has been helped by a high savings rate, but this will become less of a factor as its population ages.

• Brazil, Turkey and Mexico are poised to grow through relatively young, fast-growing populations, provided their governments foster the necessary educational and policy framework conducive to economic growth.

• Russia and South Korea will see a drag on their economies due to declining populations.

• Growth in the OECD countries is most closely correlated with population growth, with the US projected to grow at 2.4% on both a local currency and PPP basis.

• In 2050, the Japanese economy will be slightly larger than that of Russia or Mexico, and a bit smaller than that of Brazil.

PWC also forecasts the size of other emerging economies in 2050:

Vietnam is expected to develop rapidly due to high population growth, a renewed focus on entrepreneurship, and high investment rates.  Mansfield and Ogmundson say “a lot of manufacturing has already moved to Vietnam due to its lower cost structure.”  Nigeria is an oil-rich economy, and its projected growth is, in part, a function of starting from a low level of per capita GDP.  A key factor in Nigeria’s growth will be its ability to stimulate development of non-oil related revenue.  Mansfield and Ogmundson also note that Nigeria is subject to a greater-than-average level of risk from political instability.

Implications for Advisors

PWC notes that “long-term projections are subject to great uncertainties, but the broad conclusion of a shift in the balance of the global economy towards what are today regarded as emerging markets seems clear.”  The model is sensitive to many of the assumptions noted above, including population growth, investment rates, and trends in education levels.  Ultimately, these factors determine the level of productivity, which is the variable in the model with the highest level of sensitivity.  Taking these factors into consideration, PWC estimates a margin of error of +/- 30% in overall growth characteristics over the 45 year period.

The overall messages of the PWC study are the G7 economies will play a smaller role relative to the E7, and significant “surprises” like Vietnam and Nigeria will emerge.

Advisors should not adjust asset allocations based solely on this study.  We believe the study provides interesting and insightful analysis with respect to the implications of projecting existing economic conditions and demographic characteristics into the distant future.  Economies facing demographic “challenges” will surely be weakened, and vice versa, and demography cannot be overcome with quick policy fixes.  But, we believe political risk plays too great a role in economic development, and an investment strategy predicated on the growth of a particular country would be unwise.  Diversification at the country and region level is the only way to overcome this risk, from an investment perspective.  Advisors should recognize that the US and other G7 countries will have a gradually decreasing share of world GDP, but this does not necessitate a short term adjustment to asset allocation.

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