File this one in the “In Case You Missed It” folder, one of the most significant developments in the past 10 years for the global economic world order is the transition from developed market economic dominance to emerging economy world dominance. This article examines what happened and the implications for the global growth outlook.
1. Share of global GDP
This chart constructed from the IMF (International Monetary Fund) World Economic Outlook Database may surprise some in that it shows that 2008 is important not just because of the events that took place that year, but because it marked an important juncture in economic history. As of 2008 emerging and developing economies became the dominant force in the global economy, for the first time account for more than half of global GDP in PPP terms. Since then the gap has only widened and is projected to widen further; this change in the economic world order will surely be a catalyst to other changes…
2. Contribution to global GDP growth
The upside of the above graph is that emerging and developing economies have experienced faster growth (average last 10 years 6% vs DM 1.5%) and are expected to continue to grow at a decent pace (average next 5 years 4.7% vs DM 1.9%). This means that emerging economies will be a dominant driver of global growth for some time yet with EM projected to contribute an average 3 percentage points to global GDP growth in the next 5 years vs less than 1 percentage point by developed economies.
As long as emerging and developing economies can live up to the high expectations of economic growth in years to come the milestone of them becoming the largest component of global GDP is a significant positive for global growth. But it does raise the stakes, as EM economies are typically more volatile, and recently went through a slow patch. On a cyclical basis though EM PMIs and leading indicators have actually started to turn up again – something to keep in mind given the above.
Of course, the other issue is that with greater economic clout comes a greater desire for and capacity to exert and demand greater political clout. The change in the economic world order will likely catalyze the already changing political world order. One could expect an increasingly multi-polar world and greater geopolitical tension as the economic world order transition progresses.
Bottom line: Emerging and developing economies have become the dominant force in the global economy, this is a good thing for the global growth outlook.