Our long-run forecasts suggest that China will still be the second largest economy, measured at market exchange rates, in 2050. The most likely scenario is that slowing productivity growth and a shrinking workforce prevent China ever passing the US. But there’s a possibility too that China overtakes around 2030 before dropping behind again as the demographic headwinds to its growth mount.
- Our long-run forecasts suggest that China will still be the second largest economy, measured at market exchange rates, in 2050. The most likely scenario is that slowing productivity growth and a shrinking workforce prevent China ever passing the US. But there’s a possibility too that China overtakes around 2030 before dropping behind again as the demographic headwinds to its growth mount.
- The fact that China isn’t the largest economy is one of the more immediately striking points that jumps out from our forecasts of how the world will look in 2050. That’s a non-consensus view founded on analysis suggesting that China’s growth will slow more than generally expected. This is a running theme in our research; the detailed case can be found here.
- A related point the forecasts illustrate is that China’s economic weight won’t increase steadily relative to the US through time. On our forecasts, China reaches 87% of the size of the US in 2030, up from 71% now. But by 2050 it has dropped back. (See Chart 1.)
- The key reason is the mounting demographic drag that China will face. China’s labour force peaked in size in 2017. It has only contracted slightly since then, but the decline will accelerate. By 2030, China’s workforce will be shrinking by more than 0.5% each year. The US workforce will be expanding throughout the next 30 years, supported by higher fertility than in China and immigration. (See Chart 2.)
- The pace of economic convergence depends on what happens to productivity as well as inflation and the exchange rate too. But this demographic divergence means that if China doesn’t overtake the US by the mid-2030s it probably never will. And if does overtake, China may struggle to hold on to first place.
- In other words, instead of the dawning of a new era, China overtaking the US could be more like “il sorpasso”, when Italy leapfrogged the UK in the late-1980s before dropping behind.
- Does it matter whether China is ahead? “Il sorpasso” was a cause of pride in Italy but it didn’t make a difference economically. Individual incomes are what counts for livelihoods. While the demographic drag will hold back China’s GDP, we expect output per worker still to be growing faster than in the US after 2030 and for incomes to keep catching up. Average incomes in China in 2050 would be just over a fifth of those in the US, roughly where Poland and Hungary are relative to the US today. And measured in PPP terms, rather than at market exchange rates, China’s economy is already number one.
- But GDP at market exchange rates is linked to a country’s ability to project its power and values globally, and to determine the structure of international economic and financial relations. It may not matter much in this regard whether China is 10% bigger or 10% smaller than the US, but it would make a difference if the gap was significantly wider: forecasters more bullish on China expect it to be at least half as big again as the US in 2050.
Chart 1: CE Projections for US & China GDP
Chart 2: CE Projections for the US & China Labour Force (average annual growth over preceding 10 years, %)
Sources: IMF, Capital Economics
Sources: United Nations, Capital Economics
Mark Williams, Chief Asia Economist, email@example.com