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. China and India will once again become the world’s largest economies over the coming years.
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 ten largest economies. These trends could have significant implications for international investors.
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 International Monetary Fund (IMF) estimates for 2016 and PwC’s projections for 2050 to demonstrate these changes.
Overall, PwC believes that the global economy will double in size by 2042, growing at an average rate of 2.6 percent between 2016 and 2050. These growth rates will be driven largely by emerging market countries, including Brazil, China, India, Indonesia, Mexico, Russia, and Turkey, which will grow at an above-average 3.5 percent rate, compared to just a 1.6 percent average rate for Canada, France, Germany, Italy, Japan, the UK, and the US.
Implications for 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 29 percent more U.S. stocks than the U.S. market capitalization, which was 43 percent, as of December 31, 2010. 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.
Geopolitical Changes: 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 period of time, but those dynamics are quickly changing as China, India, and other emerging markets gain momentum. Investors should be cognizant of these global changes and position their portfolio to avoid home-country bias through increased international diversification, as well as hedging against potential geopolitical risks that may arise from these power struggles.