Voices: What will happen to China and the West in the future? We have the first forecasts

Sometimes in economics it is easier to see what is likely to happen in 20 or 30 years’ time than it is to know what will happen next week. This past year has been one of those times when the forecasters have been dramatically wrong.

The best (or worst) example of that has been the current inflation. In November last year the Bank of England forecast that: “We expect inflation to rise further to around 5 per cent in the spring next year. After that, we expect inflation to fall.” The latest number for the CPI is 10.7 per cent.

Of course the Bank people could not have predicted that Russia would invade Ukraine, but even without that, inflation was already overshooting. And this raises the inevitable question: if economists get the near future so wrong, why should we pay attention to their longer-term predications?

The best answer to that comes from Goldman Sachs. Back in 2001 the investment bank published a little paper, “Build Better Global Economic BRICs”, in which it coined the acronym for the four countries that would reshape the world economy over the next 50 years, Brazil, Russia, India and China. The lead author was the bank’s head of research, Jim O’Neill. He and the team then revisited the theme in 2003 with a more detailed look “Dreaming with BRICs: The Path to 2050,” which suggested that the BRICs countries could overtake the largest Western economies by the year 2039.

The effect of this work was extraordinary. Over the next few years there were BRIC mutual funds, a BRIC summit, and a BRICS Development Bank (the S came from South Africa joining the group). I can’t think of any piece of economic research that has had such a large practical influence. This is despite the fact that while China and India have indeed leapt ahead pretty much as projected, for different reasons both Brazil and Russia have failed to fulfill their potential. The bank’s forecasters had another crack at the job in 2011.

So what’s next? Earlier this month Goldman Sachs updated its forecasts, looking right out to 2075. The big message is in the title “The Global Economy in 2075: Growth Slows as Asia Rises”.

Some of this will be familiar, with China passing the US in economic size around 2035, a bit later than some of the current predictions, and indeed later than Goldman themselves predicted in their earlier exercises. On the other hand the projections for India are new and stunning: that it will pass the US around 2075 to become the world’s second largest economy after China. If that seems a very long way ahead, the report says: “In 2050, the world’s five largest economies (measured in U.S. dollars) are projected to be China, the U.S., India, Indonesia, and Germany.”

Indonesia? That’s really new, at least in the sense that Indonesia’s economic clout is only starting to be fully recognized in the West. But note too that in not much more than 25 years’ time the G5 will have only two developed country as members. Japan, currently the third largest economy, will on these projections have dropped out.

So Asia rises; no doubt about that. But what about the shifting balance of power within the present developed world, aside from the gradual decline of Japan? Here there is another clear message. The US will probably not be able to maintain the rapid growth it has managed to attain over the past decade, but it will steadily pull clear of Europe. As recently as 2008 the US economy and that of the eurozone were roughly the same size.

Now it is much bigger, and that gap increases over the coming decades, so that by 2075 the US GDP will be $51.5 trillion in 2021 dollars, whereas the eurozone will be only $30.3 trillion. Indeed India passes Europe some time in the 2050s. Other emerging economies will become much more important too. The report notes that Nigeria, Pakistan and Egypt could become some of the largest in the world.

What should we make of all this? From a European or especially a Japanese perspective this might seem a dismal outlook. We become less important in relative terms. The projections will not be right as to detail, and there are others that have a different emphasis.

It is quite possible, for example, that China’s growth will stall and that it will not pass the US after all. But stand back and I think we have to accept that what we call the West will be less important. Our ideas as to how societies should be governed will matter less. The values of other societies will be more respected, and rightly so.

For anyone who believes in the current values of western democracies this will be difficult to accept. But there is one other feature in these projections that gives hope. That is that growth of the world’s population will be starting to tail off in the second half of this century. That has to happen if we are to lighten humankind’s footprint on the planet – as we must surely do.