Amid the ongoing Covid pandemic, it is easy to overlook the significant changes in the makeup of the global economy. We tend to assume that the US and the expanding EU will become more dominant, but this does not appear to be the case. Instead, there is strong evidence to suggest that over the next 20 years, the Asia-Pacific (APAC) region will become the global powerhouse of the next generation. While the region as a whole is becoming much more powerful, individual economies are moving at varying speeds.
Before we look at the specifics associated with individual economies, it is interesting to take a broader view of the area. At the turn of the turn-of-the-century, the split of worldwide GDP was as follows:-
If we fast forward to 2021, there were signs of an increasing influence in the APAC region. In 2021, the split of worldwide GDP was as follows:-
Even though the EU has heady growth ambitions, its economic influence in relative terms is diminishing. The US, significantly impacted by the 2008 US subprime mortgage market crash, has struggled to maintain its historical influence, contrary to public perception. This leaves the APAC region as the leading economy going forward.
In the current environment, it is dangerous to predict 24-hour's forward, let alone 20 years, but the IHS Markit report attempts to do just that. Taking into account a whole range of different factors, the current prediction for the split of global GDP in 2040 is as follows:-
Looking back to the turn of the century, these forecasts suggest a significant change in the share of global GDP:-
To put this into perspective, the combined GDP in the APAC region stood at $9 trillion at the turn of the century. Fast forward to 2021, and this has increased to a staggering $35 trillion, with further significant growth expected. So while the headline figures make good reading for the APAC region, what happens if we dig a little deeper?
We will now look at some of the specific economies that make up the APAC region and how they might influence economic growth in the short, medium and longer term.
In the 1980s, Japan dominated financial markets, although 30 years of stagflation (touching on deflation) have ruined the economy. This once dominant financial powerhouse is still amongst one of the largest economies in the world but is expected to slip down the economic league table. According to a recent Goldman Sachs Global Investment Research note, Japan had the second-largest economy in 1980 and 2000 before falling to third in 2022. Further relative weakness could see Japan slip to 6th place in 2050 and 12th in 2075 - a far cry from the heady days of the 1980s!
Interestingly, many believe that the Japanese economy was less impacted by Covid due to years of economic mismanagement. While it is dangerous to write off the Japanese economy, in relative terms, it has been going backwards for some time.
It is fair to say that China has been the fuel which has fired the APAC economy in recent years. Back in the year 2000, China accounted for just 3.6% of global GDP measured in nominal US dollar terms. By 2021 this had increased to a staggering 18.6%, and while further growth is forecast, China’s share of GDP is expected to level out at around 20.6% by 2040.
One of the main issues with the Chinese economy is the ageing population. While other more “youthful” economies in the region are seeing the emergence of a younger workforce, this is not the case in China. Consequently, this will be a drag on the future growth rate, although, due to the size of the economy, it will still be a significant element of the APAC economy in the future.
Observers will be aware that the Chinese government is taking a proactive approach to international investment. For example, we have seen the expansion of the "stock connect" share trading system, which allows Chinese companies to operate secondary listings in Hong Kong, and vice versa. Not only has this increased internal trading, but international investors are now able to acquire shares in Chinese companies using local brokers and clearinghouses via the Hong Kong stock exchange.
India has long been mentioned as the next economic superpower, but so far, it has, in many ways, flattered to deceive. However, this may be about to change with Chinese population growth slowing while the rate in India continues to rise relatively sharply. If we look back to the turn of the century, the Indian population was 1.06 billion; fast forward to 2021, and the population now stands at 1.41 billion. So what is the outlook for the Indian economy?
Despite worldwide difficulties associated with Covid, inflation and volatile currency markets, the Indian economy is expected to show growth of 6.1% in the financial year ended 2023. While this is slightly down from the 6.8% GDP growth in the previous year, it is impressive in the context of the broader global economy. Looking towards the financial year ended 2024, growth is forecast in the region of 6% to 6.8%.
While India has always had the potential to be a much larger economy with higher levels of growth, there have been some fundamental changes in recent times. Reforms undertaken between 2014 and 2022 have given the Indian economy much firmer foundations. Efficiency gains and greater financial inclusion are a consequence of the digital technology revolution and will see wealth spread more evenly across the country. Like many countries in the APAC region, India has been hit hard by the spike in commodity prices, but this will fade in due course. At the heart of short, medium and long-term growth is greater financial inclusion, demonstrated by double-digit growth in bank credit in recent times.
Currently the fifth largest economy in the world, just ahead of the UK, India is expected to rise to third place by 2050 and second, behind China, by 2075.
There is also much focus on the ASEAN region, which consists of 10 nations in Southeast Asia:-
The collective economic strength of the ASEAN region is set to grow significantly in the short to medium term. To put this into perspective, the collective GDP of the ASEAN economies amounted to $3 trillion in 2020. This is forecast to rise to around $13.3 trillion by 2040, creating a collective economy larger than Japan and Germany and accounting for 5.4% of global GDP.
Focusing on individual economies, Vietnam is forecast to be one of the star performers in the short to medium term. Singapore continues to go from strength to strength, backed by innovation and forward-thinking policies in the world of finance. Looking forward, the region's rising star could be Indonesia, which is currently out of the top 15 largest economies. Goldman Sachs forecasts the Indonesian economy to be the fourth largest by 2050, retaining this position in 2075.
While collectively, the APAC region appears set for significant economic growth, there is one important note of caution. As the Chinese and Hong Kong economies continue to grow, they will still account for a substantial element of internal trade within the wider APAC and ASEAN regions. However, this influence will be diluted somewhat due to domestic growth outside China.
Looking back to the 1980s, the APAC region was a significant global influence due to the strong Japanese economy. While the 1990s saw the start of a decline in the Japanese economy, China began to rise and become an integral part of the global economy. Projecting forwards, the APAC region will obviously benefit from the growth in the Chinese and Hong Kong economies, but other countries are now coming to the fore. Consequently, the region is expected to dominate the global economy going forward, placing the US and the EU in the shade.
Even though Chinese economic growth is expected to slow in the short to medium term, countries such as India, Indonesia, Vietnam and the wider ASEAN community will step up to the plate. In addition, the region is now a prominent trading partner of the EU, with many expecting this relationship to strengthen. While there are many reasons to be optimistic about economic growth across the APAC region, much of this comes down to greater financial inclusion and a more youthful workforce. This, in turn, will create higher levels of disposable income, which will feed into various industries such as financial services.
Sceptics will suggest that forecasts for 2050 and 2075 will likely be subject to variation, but there is no doubt that the seeds of economic growth are there. As the UK and Japanese economies continue to fall down the pecking order, China, India and Indonesia are set to dominate. While more significant levels of integration between China and the global community will help the APAC region, this is not the only fuel which is firing the broader APAC economy.