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Could the UK be consigned to the “slow lane of history” for the next 40 years?

The global financial crisis has accelerated the shift in economic power to the emerging economies, according to a report published by consultants PricewaterhouseCoopers (PwC) today.

This is one of the conclusions from their “The World in 2050” report. This suggests that the so-called E7 group of emerging economies (China, India, Brazil, Russia, often referred to as the BRICs, with Mexico, Indonesia and Turkey) will overtake the G7 economies (US, Japan, Germany, UK, France, Italy and Canada) before 2020. This is measuring GDP at purchasing power parities (PPPs) which corrects for the lower price levels prevalent in emerging economies.

Even if GDP at market exchange rates (MERs) is used instead, it is still expected that the E7 group will overtake the G7 around 2032.

It is estimated that the most significant increase in the share of world GDP will actually occur in India rather than China. In 2009 India’s share of world GDP using MERs was only 2%, but this could grow to 13% by 2050.

The global order is changing away from Europe and the US towards the emerging economies.

What seems inevitable on the basis of current trends, according to PwC, is that the established world order is going to change. It is anticipated that Australia and Argentina may fall out of the group of G20 countries by 2050, whilst countries such as Vietnam and Nigeria have the potential to be added. Also, in PPP terms, Indonesia could move from being the sixteenth biggest economy in 2009, to the eighth biggest by 2050, and in the process overtaking Italy, France, the UK and Germany.

John Hawksworth, chief economist at PwC, said:

“In many ways the renewed dominance by 2050 of China and India, with their much larger populations, is a return to the historical norm prior to the Industrial Revolution of the late 18th and 19th centuries that caused a shift in global economic power from Asia to Western Europe and the US – this temporary shift in power is now going into reverse.”

He went on to point out that this trend will bring both challenges and opportunities. The challenges include greater competition from emerging countries which will gradually produce manufactured goods of higher value and also move into the area of global banking and finance.

He went on to say: “At the same time, rapid growth in consumer markets in the major emerging economies associated with a fast growing middle class, will provide great new opportunities for Western companies that can establish themselves in these markets. This applies not least to the UK, which currently sells only around 7% of its exports to the BRICs (including Hong Kong), about the same as it exports to Ireland at present and notably lower than the corresponding 10% of German exports going to the BRICs. If the UK is not to be playing in the slow lane of history for the next 40 years, then it needs to find a way to break into these fast-growing emerging markets on a much larger scale than achieved so far.”

Of course, there are many dangers for the UK going forward. The world order is changing without doubt, but that does not mean that we need to be left behind. For example, Tesco is already building shopping malls in many parts of China, in which it is the lead store, to take advantage of China’s growing consumerism. Many of these stores are away from the usual hubs that foreign companies tend to locate in, even though the Chinese infrastructure is not in place at the moment to produce significant economies of scale.

It is this sort of foresight which needs to be shown by UK companies if we are not to become a relative world ‘backwater’ over the next 40 years.

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Posted in China, economic growth, G20, International, World Trade

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