Brian Gaynor: Challenge for NZ keep up or drop out

India is expected to be the most highly populated country in 2050. Photo / AP

The world is undergoing a massive economic transformation with the emerging countries rapidly overtaking the developed economies. This has major implications for New Zealand investors, companies and the domestic economy.

Forty years ago the world was dominated by Europe and North America with the United States, Canada and 10 European countries included in the world's 20 largest economies.

The US was in first place, France third, United Kingdom fourth, Italy fifth and Canada seventh. The other countries in the top seven were Japan in second place and China in sixth.

There has been a dramatic shift since 1970, with five European countries - Netherlands, Sweden, Belgium, Switzerland and Denmark - dropping out of the top 20. France has fallen from third to eighth, the UK from fourth to seventh and Italy from fifth to tenth.

The biggest risers have been China, from sixth to second, and India, from eighth to fourth. Germany, which is now the world's fifth-largest economy, and Russia, in sixth place, were not included in the 1970 figures because they were different entities 40 years ago.

A January 2011 report by PricewaterhouseCoopers (PwC), called "The World in 2050", has highlighted this transformation. The study has received widespread media coverage in the Northern Hemisphere.

PwC has developed a model that attempts to forecast the world's largest economies in 2050. The accompanying table, which lists the countries according to PwC's 2050 rankings, shows China in first position, India second and United States third. The highest ranking European countries are expected to be Germany in ninth position and the United Kingdom in tenth.

PwC makes two important assessments:

"In many ways this renewed dominance of China and India, with their much larger populations, is a return to the historical norm prior to the Industrial Revolution of the late 18th and 19th centuries that caused a shift in global economic power to Western Europe and the US - this temporary shift in power is now going into reverse.

"Our key conclusion is that the global financial crisis has further accelerated the shift in global economic power to the emerging economies. Measured by GDP in purchasing power parity (PPP) terms, which adjusts for price level differences across countries, the largest E7 emerging economies (China, India, Brazil, Mexico, Russia, Indonesia & Turkey) seem likely to be bigger than the current G7 economies (US, Japan, UK, Germany, France, Canada and Italy) by 2020 and China seems likely to have overtaken the US by that date. India could also overtake the US by 2050."

The World Bank's report "Global Economic Prospects - January 2011" confirms this view that the global financial crisis has accelerated the shift in economic power to the emerging economies. The World Bank report contained the following GDP figures:

In 2010 the emerging countries expanded by an estimated 7.0 per cent whereas the developed countries grew by only 2.8 per cent.

In 2011 the emerging world is forecast to outperform the developed world by 6 per cent to 2.4 per cent.

In 2012 the gap is expected to widen with the emerging countries forecast to grow by 7.0 per cent and the developed countries by just 2.7 per cent.

But the most startling aspect of the PwC analysis is the extent to which China, India and the United States will leap ahead and dominate the world economy by 2050.

In 2050 the third-placed economy (US) is forecast to be 3.9 times larger than the fourth-largest economy (Brazil) whereas at present the third-placed country (Japan) is only 1.1 times larger than the fourth-largest economy (India).

Looking at it another way, total GDP of the top three countries is forecast to be US$140,531 billion in 2050 whereas the GDP of the remaining 17 top-20 countries is expected to be only US$87,479 billion.

By comparison the top three countries have a combined GDP of US$27,282 billion at present and the remaining 17 countries US$27,988 billion.

PwC's long-term model is driven by the following factors:

Labour force growth.

Increases in human capital, mainly through better education.

Growth in physical stock, which is driven by capital investment.

Productivity growth with technology playing a major role.

Essentially PwC is arguing that the advantages the developed countries received from the Industrial Revolution and their superior democratic political systems is over, with the developing world now catching up rapidly because of much higher populations, the adoption of new technologies and pro-growth governments.

Thus total population, which is covered in the three right-hand columns of the accompanying table, will become increasingly important in the years ahead.

All 12 countries had positive population growth over the past 40-year period but China, Japan, Russia and Germany are all expected to experience a decline between now and 2050. The population declines in Japan and Russia are forecast to be particularly severe.

India is expected to be the most highly populated country in 2050. Brazil, Mexico and Indonesia - which have all had massive population growth - have also had rapid GDP growth.

John Hawksworth, PwC's chief economist, is quoted as saying: "Rapid growth in consumer markets in the major emerging economies, associated with a fast-growing middle class, will provide great new opportunities for Western companies that can establish themselves in these markets."

As far as New Zealand is concerned, this means that China, India and, to a lesser extent, Indonesia will become increasingly important export markets although the US and Australia will remain important markets for us.

Australia has avoided the worst of the global financial crisis but in terms of GDP it has dropped from ninth position in 1970 to 17th at present and is forecast to be in 21st place in 2050. Nevertheless it has performed remarkably well considering that all of the countries ahead of it, in terms of total GDP, have more inhabitants.

New Zealand has slipped from 39th position in 1970 to 60th at present and is not included in the PwC analysis because the latter only covers the largest economies.

However, based on PwC's model inputs - particularly labour force growth, capital investment and productivity growth - we would probably slip well below 60th position by 2050.

An important point to note is that Australia's population is growing more rapidly than ours. In 1970 it had 4.3 times more inhabitants than us, it is now 5.5 times greater and by 2050 it is forecast to have 6.8 times more people than New Zealand.

Many New Zealanders will be happy with our low population growth but at the same time we want all the trappings of the modern world, including the latest electronic gadgets, late-model automobiles, generous retirement schemes and a world-class health scheme.

We cannot expect to have these unless we generate sufficient domestic economic growth and exports to pay for our imports. We also need a higher tax base to pay for a world-class state pension scheme and health system.

The clear message from the last decade or so is that the world is changing rapidly and investors, companies and countries will thrive, or drop behind, depending on their ability to anticipate, and respond to, these changes.

New Zealand also has to have a clear strategy regarding the ownership of the country's important assets because a number of emerging countries, particularly China, will have the financial resources to gobble these up. It is important for us to realise that our assets will be more vulnerable to foreign predators if we remain a slow-growth economy.



Brian Gaynor is an executive director of Milford Asset Management.

bgaynor@milfordasset.com