2013 will be the first time since reliable records began when what are today the emerging and developing economies will be bigger than the advanced economies (see Figure 1) Although this is only true for GDP measured in purchasing power parity (PPP) terms, which takes into account price differentials across the economies and overstates the size of less developed economies at current market exchange rates, this will be a symbolic event that is expected to set the trend for decades to come.
Figure 1 (right) – In 2013 emerging and developing countries are projected to have bigger economies than advanced countries for the first time since reliable records began.
Figure 2 – China, India and Brazil to account for nearly half of world GDP growth in 2013
Advanced economies in the back-seat of global growth: In 2013, we expect the world economy to expand by 3.3% in PPP terms - close to its long-term trend rate. But what will change from past cycles is that the emerging economies will be critical in driving global economic growth. Figure 2 shows that China, India and Brazil are projected to contribute around half of global economic growth in 2013. This contrasts with the 25 years preceding the financial crisis, when they contributed only around a quarter of global growth.
We also think, however, that 2013 could be a year when the US, after narrowly avoiding falling off the fiscal cliff, will return to near trend levels of growth. Despite this, the largest economy in the world is still expected to contribute only around 10% of global growth as opposed to around 30% during the 1995 to 2000 period after the last major international recession of the early 1990s. Meanwhile, the Eurozone will not contribute at all to global growth in 2013.
What does this mean for business? The key message is: adapt, because ‘business as usual’ is changing. Our analysis shows that the importance of emerging economies in driving global growth will persist. China, for example, is projected to have a bigger economy than the US in PPP terms before 20201. Businesses based in advanced economies that want a market growing at more than 2% per annum in real terms (which is the projected per annum real trend rate of advanced economies in the long run) need to look beyond their traditional home markets. In 2013, expansion in the emerging markets will no longer be viewed as a speculative investment, but core to business growth. But it will also bring new risks that have to be assessed and managed.