Which Nation Will Drive Global Growth in 2016?
As 2015 quickly draws to a close, you might be wondering what 2016 has in store for us. This week we asked readers of CFA Institute Financial NewsBrief which country they think will contribute the most to global economic growth in 2016. Here’s what they had to say.
The United States: 42%
At more than US$18 trillion, the United States is no doubt the largest economy in the world and will remain so for many years to come. However, the consensus view on its growth picture is far less impressive. The Wall Street Journal survey of 60 economists currently puts the growth rate at 2.6%, which translates into a roughly US$450–500-billion contribution to global economic growth in 2016.
Since we know China’s GDP is roughly 60% of US GDP and its growth rate is expected to be at least twice as high, our readers are clearly more positive on the growth potential of the United States vs. China compared to the consensus. Will the economists be proven wrong?
There is obviously also the possibility of survey respondents confusing economic growth with the absolute size of the economy.
China’s GDP came in at about US$10.3 trillion over the last four quarters at the current exchange rate. The World Bank expects that it can grow by 7.0% in 2016, which translates into an over US$700-billion contribution to global economic growth. So at least on paper, this is the right answer to our question according to consensus.
So why do our readers not agree? There is indeed an intelligent reason not to choose China. More and more people doubt the accuracy of China’s statistics these days. These questions have surrounded China since the early days of its economic miracle. Most of those with doubts, however, have been proven wrong by the economic reality over recent decades. This time though, the questions seem to have data backing them up.
There are also several not-so-intelligent reasons not to choose China. Some could have confused GDP growth with GDP itself. Others could have been influenced by the slate of news on the slowdown in China’s economic growth. Bear in mind these three things — GDP, GDP growth (i.e., the change in GDP, which what we are asking), and change in GDP growth (which is what the headlines are focused on these days) — are quite different really.
The World Bank pegs India’s GDP growth rate in 2016 at 7.9%, the highest among all countries where the organization produces a forecast. Does that mean India will contribute the most to global economic growth next year? Unfortunately no, and the reason is simple: India is rather small compared to the United States and China, so it would be quite hard for India to move the needle for the rest of the world.
India’s GDP is just above US $2 trillion, so it will need to grow its GDP by more than 20% a year to beat the US contribution and more than 30% to beat China’s.
Germany: 3%; Other: 2%
I guess everyone has taken it to heart that the European economies have far from recovered from the financial crisis. And there are no other countries in the world that have both the scale and the growth rate to challenge China or the United States as top contributors to global economic growth next year.
We intentionally tweaked the question to avoid simply asking which country will have the highest growth rate because we think that the broader picture is what matters the most to the rest of the world. As we have shown, scale alone does not guarantee you the championship in this race. But without scale, having the highest growth rate is not enough either.
When the world searches hard for engines that will propel us out of the economic doldrums, it pays to know where to look. Apparently, the last place to look is the newspaper headlines.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.