Emerging Asia is expected to dominate global growth in the next three decades and beyond, according to a new report.
By 2050, four of the world’s seven largest economies will be in Asia. China looks set to overtake the United States as the world’s largest economy by 2035 and India could take fourth place by the early 2030s, the abrdn Research Institute (aRI) says in its latest research.
Indonesia is set to be the world’s seventh largest economy by the mid-2040s, with Japan at fifth spot. This means Asia will dominate the global economy over the second half of this century. Analysis also shows the Philippines, Pakistan, Bangladesh and Vietnam are all set to be in the top 25 global economies.
According to abrdn, Emerging Asia could account for 58% of global growth by 2050. Meanwhile, global growth is set to slow from around 2.5% a year to 1.5% a year by 2050 – in part due to less support from population growth in the major economies.
In forecasting Asia’s outperformance, the report cites the region’s more favourable demographic backdrop and the opportunity for it to play catch-up with developed peers.
For example, income levels are still relatively low in many Asian countries. There is still massive potential for workers to move out of agriculture and into more productive manufacturing and service jobs, while many Asian firms have yet to reap the efficiencies of technology and industry-leading processes to boost productivity.
The whole of Asia could account for almost half (46%) of the global economy – an increase from 35% today. Robert Gilhooly, senior emerging markets research economist at abrdn, says: “In any country or region, long-term economic growth requires three things: an increasingly skilled workforce, investment in infrastructure, equipment and technology, and improving productivity. Asia’s emerging markets – from China and India, to Indonesia and Vietnam – demonstrate all three of these essential building blocks. Across the region, we see the structural drivers for economic growth to outperform both developed markets and other emerging markets.”
The report also cites the demographic dividend in the region. India and Indonesia are expected to see their populations expand by 253 million and 42 million, respectively, by 2050. Although in other Asian markets, population growth is less supportive and demographic profiles are less favourable, other factors should compensate, such as an improvement in dependency ratios – the ratio of workers to non-workers (primarily in India, Indonesia and Malaysia) – and the scope for an improvement in the quality of the workforce through education and skills development.
Asia may also dominate global manufacturing, although growth is rotating towards the consumer. Despite pressures in developed markets to reshore jobs, supply chains are too tightly knit to unravel quickly. And as urbanization expands and personal incomes rise, Asia is set to power global consumption of goods and services.
China’s consumer market is already 50% the size of that of the US. By 2050, aRI predicts it could be almost 10% larger at US$25 trillion. India’s consumer market is also set to grow fourfold over the next 30 years, aRI says. Overall, Emerging Asia is predicted to more than double its consumption. In the euro area, consumption is only expected to grow 18% over the same period.
As consumption grows in Asia, spending patterns will increasingly resemble those seen in middle and high-income economies, with more devoted to discretionary spending. A growing ‘silver economy’ of older consumers will amplify this trend, further boosting spending on healthcare and entertainment, the report says.
Urbanization is driving infrastructure demand. With rapid economic development and growing populations, Asia needs more transport, homes, and public service infrastructure. This demand will drive capital expenditure and economic activity. Less-developed countries, especially those in Asia, are only 40-60% urbanized. As urbanisation expands, it should drive construction activity and a concomitant rise in economic activity (GDP) – even in those Asian markets where demographic factors are not so supportive.
According to aRI’s calculations, almost US$1 out of every US$2 of global investment will be spent in Asia, and the region will account for half of all global investment up to 2050 – potentially US$390 trillion (2015 USD terms).
“Whether emerging Asian economies will ultimately deliver this expected outperformance does, of course, still depend on a multitude of factors, such as the strength of government institutions and the ability to navigate political pressures, economic imbalances and other macro risks, says Peter Branner, chief investment Officer at abrdn.
“The good news is that these uncertainties are already priced in, as reflected in the discounts in emerging markets assets relative to developed markets. Given the powerful and positive drivers our research has outlined we believe the potential is clear to see,” Branner adds.