The Past Is The Future (When It Comes to GDP)

This graph ends in 2005 – PWC has apparently projected that China will overtake the US in GDP by 2020. With a growth rate north of 8% lately, India will eventually overtake the US as well, rolling the clock back to the year 1600 or thereabouts. This makes sense – both India and China dominated in pre-Industrial Revolution GDP owing to their large population base, and they are now simply catching up as they rapidly industrialize.

Here is the original pdf containing the referenced graph, as presented to the International Conference of Commercial Bank Economists.

China’s GDP May Exceed US GDP by 2017

When measured in purchasing power parity terms (PPP), China’s GDP stood at $7.9 Trillion in 2008, compared to 2008 US GDP of $14.4 Trillion. If China’s GDP growth exceeds US GDP growth by 8% for the next 8 years, then China’s GDP will exceed US GDP by 2017 [1].

China need not continue growing at a 10% clip to surpass the US – it simply needs to exceed US GDP growth by 8%, which it has done for most of the last 3 decades. If the US recovery from the Great Recession is prolonged, it’s quite possible that US GDP growth will hover between 0 and 1% for some time. In that scenario, China need only maintain 8% GDP growth over the next decade. They appear likely to accomplish this feat in both 2008 and 2009, during the heart of the recession!

In nominal (exchange-rate) terms, China’s 2008 GDP was only $4.4 Trillion, still less than a third that of the US. But that will change with a weakening dollar and an appreciating yuan, and this may be accelerated if key commodities like oil eventually begin trading in currencies other than the USD. The NextBigFuture blog takes into account the historical trend of US-Chinese exchange rates, and concludes that even in nominal terms, China’s GDP will surpass US GDP in 2017.

Don’t be surprised if eight hence, China has the world’s largest economy. After all, China and India were the world’s largest economies for most of the last few millenia [2]. The world economic order appears to be reverting to norm.

[1] The US economy was 82% larger than the Chinese economy in 2008, when measured in PPP terms. 8% growth compounded over a decade yields 85% growth (1.08^8) – which means that the Chinese economy will just barely surpass the US economy in eight years if China’s growth continues to exceed US growth by 8%. In concrete terms, assume that China grows at 10% per year over the next eight years, and that the US grows at 2% per year. In 2017, China’s GDP would be $16.9 Trillion, compared to US GDP at $16.85 Trillion.

[2] See the chart on pdf page 4 of this paper presented to the International Conference of Commercial Bank Economists:

Click to access ICCBEChinaIndia.pdf