Winners and losers in the global economy of 2025

Europe's World

Asia, Africa & Emerging Economies

Picture of Jim O'Neill
Jim O'Neill

Former chief economist of Goldman Sachs

If the coming eleven years see the global economy evolve at the speed of the past eleven, the world in 2025 will be a very different place. For Europe’s policymakers, this will represent a great challenge to status quo thinking, for Europe has long seen itself as the world’s most important economic region. In 2025, this will not be the case: there is even a good chance that its two closest post-World War II partners, France and Germany, will no longer be each other’s most important trading partners.

In a decade from now, China will be almost as large an economy as the U.S., unless it departs dramatically from the path it has been on since 2001, when I first coined the ‘BRIC’ acronym to describe the rise of Brazil, Russia, India and China. Projecting towards 2050, I suggested that China’s economy could match that of the U.S. by 2027 – and based on new data from the World Bank’s international comparison programme, it probably has already done so in purchasing power parity (PPP). China’s GDP today is around about $9.2 trillion: over half that of the U.S., bigger than that of Germany, France and Italy combined, and almost double that of Japan.

Among the greater challenges to global economic governance is how the dollar will develop alongside the rise of the RMB – and this is very hard to predict

While China’s annual growth rate has slowed to about 7.5%, we shouldn’t exaggerate this as a ‘slowdown’. Many economists had long expected some slowing after three decades of growth in double digits, and much of this decline has actually been induced by government efforts to sustain a better quality of growth, rather than focusing on sheer quantity. In this future China, different areas will dominate their economic landscape and there will be new winners and losers.

Although the days of China’s 10% growth rate may be over, by 2025 its economic development will remain the most powerful. China’s economy is already about one and half times the size of the other three BRIC countries put together, creating in economic terms the equivalent of a new India every two years. China is now the biggest export market for many parts of the world, as well as being the biggest source of imports. So as we go through the next decade, subtle changes in trade relationships are likely to occur. For countries leading in high value added exporting, China will become more of a key market than ever, and countries like Germany that have already benefited from this will continue to do so. It is quite likely that China will become Germany’s single largest export market long before 2025.

Countries like the UK might, meanwhile, start to do better than in the past once China focuses more on higher quality service items like healthcare and on advanced technologies for energy efficiency. It is also possible that some European ‘losers’ of the past, especially those that suffered from China’s cheapness as a source of low value added exports, might start to do better. Portugal and Italy have been at the forefront of this challenge, but the increased value of the Chinese renminbi (RMB), together with the ongoing rise in Chinese wages, means that China will no longer be the competitive threat it once was.

China’s economy is already about one and half times the size of the other three BRIC countries put together, creating in economic terms the equivalent of a new India every two years

Each of the other BRIC countries has a GDP of approximately $2 trillion – similar to that of Italy – though the exact figures depend on their own exchange rate against the dollar. But by 2025, India should start to emerge as somewhat bigger than the others because its favourable demographics give the country a high growth potential. Of course, achieving this potential requires effective policymaking, but the strong electoral victory of India’s new prime minister Narendra Modi offers a perfect opportunity to introduce powerful reforms that could accelerate the growth rate.

And although India’s economy is unlikely to reach the size of China’s in the next decade (or even the next three), it is quite possible that the country could experience stronger GDP rates of growth, perhaps more than 7%, over the coming decade. Introducing a simpler governance structure will lie at the heart of India’s opportunity to reform, and if implemented could unleash years of powerful investment-led growth. This would be a great opportunity for countries like Germany, Japan and South Korea, which greatly benefitted from similar developments in China. If India continues on this path, its economy could by 2025 be the same size as Japan’s, and will most likely have surpassed those of all individual European nations.

The two other BRIC countries, Brazil and Russia, are set to find the next decade more challenging, as they need to wean themselves off being so dependent on commodities by making their economies more competitive and allowing scope for more private sector investment. Though not impossible, such adjustments will require much more boldness than is currently being displayed by their policymakers. Despite these challenges, both countries should be able to match European countries’ growth rates, and so will easily figure by 2025 in the list of the world’s top 10 economies. If not bigger than Germany, they will by then be at least as big as France, and maybe even the UK.

The BRIC countries will collectively be well on their way towards becoming as large as the G7 economies (though it might take a further five years to mathematically achieve this fate). This will have profound consequences for global economic and social governance, requiring the world’s (relatively) declining economic powers to give up some space in the global order – and that’s going to be a big challenge for the leading European countries. China alone will be effectively the same size as the U.S. or the EU and will insist on playing a bigger role in the IMF, World Bank, G20 and, one presumes, a more effective and modernised version of the G7. The largest European countries will need to come to terms with the reality of no longer being individually represented in these fora, and instead accept a combined representation at the G7 and perhaps in the IMF too. If not, these organisations risk losing their legitimacy. It will be extremely difficult for these countries to accept this, but without such changes these international organisations will be unable to play roles they were created for.

France, Germany and the UK are likely to remain among the world’s 10 largest economies, but Italy will by 2025 barely be hanging in there, against strong challenges from Mexico, South Korea, Indonesia and Turkey

France, Germany and the UK are likely to remain among the world’s 10 largest economies, but Italy will by 2025 barely be hanging in there, against strong challenges from Mexico, South Korea, Indonesia and Turkey.

Another ‘winner’ likely to profit from China’s rise is, in my view, the U.S., as long, that is, as Washington can handle the geopolitics of there being another economy as large as its own. In many ways, the next eleven years will be all about the U.S. and China being able to sit side by side as the world’s two dominant economies, accepting each other despite their different choices of governance and socio-political structures. If they can do this, both will benefit greatly.

The threats felt in the U.S. that American industry is being hollowed out by China should dissipate. With the relative shift in the value of their currencies and the dramatic shift in the availability of cheap domestic energy, the U.S. is likely to see a modest resurgence of its productive industrial capacity, and with this its ability to export to the rest of the world, China included. The days of massive trade deficits in the U.S. and surpluses in China will, come 2025, be no more.

Among the greater challenges to global economic governance is how the dollar will develop alongside the rise of the RMB – and this is very hard to predict. If this were based purely on economic size, it would be more straightforward and I would expect the RMB to supplant the role of the dollar in much international trade, possibly including the price of some commodities. But when considering domestic preferences, it is unclear whether China will want the RMB traded as openly and freely as will be necessary. And though it’s possible that China will push for some overhaul of the international monetary system, in which the major exchange rates do not trade freely, this is something the U.S. would oppose, and presumably would only agree to under crisis circumstances similar to those of 2008-09.

It is similarly difficult to forecast confidently how the EU, and specifically the eurozone, will cope with this new world. If Europe were to truly develop an outward-looking mindset, all the predictions I have made would probably be very positive for Europe as a whole. This would, however, also require Europe to be a lot more flexible than it has been in recent years, less obsessed with protecting losers and bolder about finding winners. One can only hope that a new generation of leaders, perhaps not so encumbered by Europe’s 20th century history, might be better placed to deliver, for there is little sign of today’s leaders being able to grasp the opportunities.

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