By 2050 Western Europe could be an economic irrelevancy, with its four leading economies, the UK, Germany, France and Italy (note the order?) enjoying a combined output of less than half India?s and a third of China?s. Both Brazil and Russia will be twice as large as any single Western European economy.
This is the implication of a research report, ?Dreaming with the BRICs? released by US investment bank Goldman Sachs. The report notes that on what it calls reasonable demographic and economic assumptions, the BRICS (Brazil, Russia, India and China) will have a combined GDP larger than the G6 (US, Japan, Germany, the UK and France) by 2050, when China will be the largest economy in the world (having overtaken the US in 2041). As early as 2009 the report expects the annual increase in dollar GDP of the BRICs to outstrip that of the G6.
The growth in relative economic power comes from three sources. First the report expects productivity growth in the BRICS to outstrip the G6 as they ?catch-up? with the leading economies. Second demographics are in their favour (with the partial exception of Russia) as their working-age populations continue to grow quickly. Finally, and importantly, the report expects their exchange rates to appreciate, boosting GDP when measured in US dollars.
The hurt feelings of Americas and West Europeans, used to being in charge, may be soothed by the fact they?ll still be richer than their Chinese or Indian cousins, given in terms of GDP per capita, the G6 economies will maintain a lead, though it will shrink. By 2050 Chinese per capita income is forecast to be 37% of the US level, though it will be over 50% of the UK level and over 60% of French and German. In any case this only suggests that further catch-up (and hence in terms of overall GDP, a larger lead) is possible.
Such startling conclusions are obviously open to debate. Economic forecasts for next quarter are often spectacularly incaccurate, so over decades one would be right to be a little sceptical.
The report acknowledges that its growth assumptions are generally rosy (I?ll leave the debate on the merits of its economic growth model to those more qualified than I), and that for its projections to come true the BRICs must maintain growth friendly policies, which it says are to have sound macroeconomic policies with a stable macroeconomic background, strong and stable political institutions, openness to trade and foreign investment and high levels of education.
With the exception of China (and to a lesser extent India) the BRICs past economic record does not inspire much confidence. Running their models from 1960, to test their forecasting power, GS found that India, Brazil both fell short (as would have Russia) and even in the last few years Brazil in particular has fallen far short of its potential.
Furthermore none of the countries can be said to have had particularly stable and good governance, though at various times some have had stable and some have had good. The risks of major political and social upheaval cannot be discounted in any of them.
So perhaps Goldman Sachs are being a little optimistic, though even on more pessimistic scenarios it is pretty clear that Europe?s relative economic power is on the wane. All the more important therefore to be top dog within Europe, and the report suggests that the UK, due to a combination of better demographics and growth is expected to overtake the German economy in 2036 (not the next ten years, please note), and by 2050 its GDP per capita is forecast to be around 30% higher than France or Germany?s, and 50% higher than in Italy. Is this realistic? Possibly not, as though the demographic case, barring major changes in immigration or birth rates (and soon) is well established, it seems unlikely that such large differences in per capita GDP will occur in such a tightly integrated economic area.