03/03/2006 00:01

UK businesses should view the much-heralded shift in economic power to emerging markets such as India and China as an unprecedented opportunity to boost trade rather than an economic death knell, according to a new report by PricewaterhouseCoopers LLP.

By the year 2050, what the report calls the ‘E7’ economies (China, India, Brazil, Russia, Indonesia, Mexico and Turkey) will have outstripped the current G7 (United States, Japan, Germany, UK, France, Italy and Canada) by between 25%, when comparing Gross Domestic Product (GDP) using market exchange rates, and 75%, when using purchasing power parity (PPP) exchange rates (see Note 1 in Notes to editor for an explanation of terms used).

But this should create major new market opportunities, allowing companies in established OECD economies like the UK to specialise further in their areas of comparative advantage, while their consumers continue to benefit from low-cost imports from the emerging economies – a ‘win-win’ outcome according to PricewaterhouseCoopers LLP.

The report, entitled The World in 2050: How big will the emerging market economies get and how can the OECD compete?, is summarised in an article in PricewaterhouseCoopers regular UK Economic Outlook report, which is published today.

The analysis reveals some potentially surprising conclusions. For example, as Table A shows (attached), projections suggest that India has the potential to be the fastest-growing large economy in the world, followed by Indonesia – both ahead of China due in particular to their less rapidly ageing populations.

John Hawksworth, Head of Macroeconomics at PricewaterhouseCoopers LLP and the paper’s author, said:

“These long-term projections are of course subject to significant uncertainties. But this does not alter our view of the likelihood of a major shift in world GDP shares from the G7 to the E7 by the middle of the century. If the emerging market economies continue to grow broadly in line with our projections, their rapid growth will present major opportunities for UK businesses to open up new markets overseas. UK companies need to factor these projections into their future planning to ensure they are best placed to take advantage of these opportunities.

“A common perception among many UK businesses is that emerging economies like China and India are a threat and, at first sight, the UK’s declining position over time in our league table of relative economic size might seem to support this view. But trade is not a zero-sum game and the UK economy as a whole should benefit from the growth of these emerging economies by allowing us to specialise further in areas where we have a comparative advantage. Maintaining a flexible and open economy, while promoting education, will be the key challenges for Government if this potential is to be realised.”

As summarised in Table B (attached), the report concludes that, providing these emerging economies maintain a policy environment conducive to continued rapid growth:

• The UK economy could slip from fifth place in 2005 to ninth place in 2050 when ranked by GDP at market exchange rates, behind China, India, Brazil, Indonesia and Mexico, according to these projections. In PPP terms the UK economy may only be around one tenth of the size of the Chinese economy by 2050. On the other hand, the UK should remain ahead of France and Italy and close the gap with Germany significantly given the UK’s more favourable demographics.

• India has the potential to be the fastest-growing large economy in the world over the period to 2050, with a GDP at the end of this period close to 60% of that of the US economy at market exchange rates, or around the same as the US at PPPs.

• The Indonesian and Mexican economies should also grow relatively rapidly, having the potential to be larger than those of either Germany or the UK by 2050, both at market exchange rates and PPPs.

• Growth in the Chinese economy is expected to slow in the long run
due to experiencing significant declines in its working age population between 2005 and 2050, but it is still projected to be around 95% of the size of the US economy at market exchange rates by 2050, or around 40% larger at PPP rates.

UK growth should pick up gradually in 2006 and 2007, though risks are weighted to the downside

PricewaterhouseCoopers latest UK Economic Outlook report also includes an analysis of short-term prospects for the UK economy, projecting that growth should pick up gradually from an estimated 1.8% in 2005 to around 2.25% in 2006 and around 2.75% in 2007, led by business investment.

John Hawksworth added:

“Our main scenario for UK growth is fairly benign but risks are weighted to the downside and the Monetary Policy Committee should stand ready to cut interest rates if there are any signs that growth is not recovering as fast as expected.”

ENDS

1. There is no single right way to measure the relative size of emerging economies as compared to the established OECD economies. Depending on the purpose of the exercise, GDP at either market exchange rates or purchasing power parity rates (PPPs) may be the most appropriate measure. In general, GDP at PPPs is a better indicator of average living standards or volumes of outputs or inputs, while GDP at market exchange rates is a better measure of the size of markets for OECD exporters and investors operating in hard currencies at any given time. For a fuller explanation of these and other aspects of the PricewaterhouseCoopers growth modelling methodology, please refer to the detailed article in our UK Economic Outlook report. Further methodological details, including a more extensive sensitivity analysis, are provided in the full report.

2. The report notes that the scale of the opportunity for UK companies is illustrated by the fact that the share of UK visible exports going to the E7 economies in 2004 was only around 5%, compared to around 44% going to the other six G7 economies, according to the Office for National Statistics.

3. An electronic copy of the full report The World in 2050: How big will the emerging market economies get and how can the OECD compete? is available on request to the media and PricewaterhouseCoopers clients by emailing john.c.hawksworth@uk.pwc.com. A detailed article based on this report is being published today in the latest issue of our regular UK Economic Outlook report, which will be available to be downloaded from our website at http://www.pwc.com/uk/economicoutlook from 3rd March 2006.

4. The member firms of the PricewaterhouseCoopers network provide industry focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 148 countries across our network work collaboratively using connected thinking to develop fresh perspectives and practical advice.

Unless otherwise indicated, PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP (www.pwc.com/uk) a limited liability partnership incorporated in England. PricewaterhouseCoopers LLP is a member firm of PricewaterhouseCoopers International Limited.

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