The World Economic League Table 2016

The World Economic League Table 2016
The Prospects Service January 2016

World Economic League Table 2016
Contents This report is produced by the Centre for Economics and Business Research (Cebr) as part of our macroeconomic trends, analysis and forecasting advisory membership service, The Prospects Service. This report and all associated material shall remain the property of Cebr and are only made available to bone fide employees of organisations with a current and fully paid- up membership of The Prospects Service. Such materials may not be disclosed or transmitted to individuals or organisations outside the member organisation without prior written permission from a director of Cebr. Cebr is not licensed in the conduct of investment business as defined in the Financial Services and Markets Act Any client considering a specific investment should consult their own broker or other investment adviser. Any views on investments expressed by Cebr, or on behalf of Cebr, are intended to be generic only. Cebr accepts no liability for any specific investment decision which must be at the investor's own risk. Whilst every effort has been made to ensure the accuracy of the material in this report, neither the authors nor Cebr will be liable for any loss or damages incurred through the use of this report or associated materials. Executive summary 3 Global growth 4 39 ‘hothouse economies’ 6 Commodities, trade and exchange rates 8 Americas 13 Europe 18 Asia and Australia 29 Middle East and Africa 41 Iran, Israel and Sri Lanka 45 The economic outlook covers nearly 90% of the global economy. Figures are calculated at market exchange rates.

Executive summary Slower Chinese GDP growth and a weaker currency mean that it is now forecast to overtake the US in 2029 compared with 2025 in last year’s forecasts Japan has the weakest forecast growth of all major economies and is likely to be overtaken by both the UK and Germany during the 2030s Germany’s population is likely to be over a million larger than we assumed last year because of migration, from Syria especially. As a result, its GDP is no longer likely to be overtaken by the UK by 2030, although we still expect this to happen during the following decade India is now starting to catch up with China and will eventually overtake in the second half of the century Korea is overtaking most of the European countries and will be one of the world’s top 5 economies at some point in the 2030s Some of the weaker European economies like France and Italy are slipping way down the table. They face exclusion from bodies like the G8 and possibly eventually the G20 as their economies persistently underperform Russia has dropped x places in 2015 and is unlikely to move up the league for the foreseeable future. Other oil and commodities based economies are forecast to do worse than we previously expected, though we have prepared these forecasts on the assumption that the oil price will revert to $60-70 during as the world economy recovers and the demand for oil revives The world’s fastest growing region over the next 15 years is likely to be Central Asia. The world’s slowest growing region is likely to be Western Europe. Lower down in the table there are some interesting movements. By 2030, Sri Lanka, Belarus, Morocco, Kenya and Ethiopia will enter the top 60 world economies for the first time in the modern era.

We assume slower than traditional growth in the world economy with oil and commodity prices weak We forecast that world growth will average below 3% in real terms over the next 15 years The two reasons for this slow growth are: some of the key economies, notably China, are starting to mature and their growth is slowing; and the knock-on impact of the economic imbalances currently engrained in the system. Although we predict that the Chinese savings ratio will fall from the 50% of GDP that it averaged from 2007 to 2012 to about 35% by 2030, this will still leave the world with a deflationary bias. And it is difficult to see Chinese savings any lower than this for structural reasons – lack of transparency in accounting keeps corporate savings high while lack of welfare or pensions safety nets (though these are starting to emerge) encourage households to save for a rainy day. Arguably there is a strong case for expansionary fiscal policies in many economies where the current debt to GDP ratio is low. In other countries, there may be little alternative but for the Central Bank to repurchase government debt and cancel it. Without this it is likely that growth will be volatile and we expect at least one severe economic downturn over the next 15 years. But our forecasts post 2020 assume trend growth because we have little idea when this downturn will occur. Meanwhile, the weak energy and commodity prices we assume will heighten political as well as economic instability in areas like the Middle East. World real GDP, annual growth Source: IMF, Cebr forecast

Changing regional shares of the world economy
World Economic League Table 2016 Changing regional shares of the world economy . The table shows the pace at which the world is adjusting to the ‘Asian Century’. Not only does East Asia over from both Western Europe and North America to become the world’s largest economic region (already in 2015) but Central and South Asia accelerates past the Middle East and Latin America to become the world’s 4th largest region. The world’s fastest growing region is forecast to be Central and South Asia, boosted by China’s One Belt/One Road infrastructure policy and by economic development in the Indian sub Continent. Its share of the world economy is forecast to grow from 2.8% in 2000 to 10.0% in 2030. The world’s slowest growing region is likely yet again to be Western Europe. Its share of the world economy is forecast to fall from 26.4% in 2000 to 15.4% in 2030.

Thirty nine countries with annual growth above 5%
World Economic League Table 2016 Thirty nine countries with annual growth above 5% Real GDP, CAGR

We see 39 countries with annual growth rates exceeding 5%
World Economic League Table 2016 We see 39 countries with annual growth rates exceeding 5% From major powerhouses like China, India and Indonesia to much smaller economies we see a wide range of ‘hothouse’ countries with economic growth at twice the world GDP growth rate or more We forecast 39 ‘hothouse’ economies with GDP growth from averaging above 5% or nearly twice the world GDP growth rate. These include three major economic powers – China, India and Indonesia. We discuss the prospects for each of these in subsequent pages. A second group of ‘hothouse’ countries – the Philippines, Pakistan, Vietnam and Qatar are forecast to be in the world’s top 40 economies by 2031. A third group: Iraq, Kazakhstan, Kenya, Sri Lanka and Ethiopia are climbing the ladder into the world’s top 60 economies. Most of the other countries in the table on the previous page that are forecast to achieve rapid growth are recovering from extreme underdevelopment, socialism or war. In some cases a combination of the above. One of the most promising economies is Sri Lanka. This is a country where the social indicators like levels of education, health and life expectancy show a much higher level of economic development than the economic indicators, in particular GDP per capita. In this case we think it is highly likely that the economic indicators will move into line with the social indicators, implying rapid GDP growth in the coming years.

Commodities, trade, and exchange rates

Oil prices will remain low but subject to politically driven volatility With the Saudis and the Iranians starting the year by breaking off diplomatic relations, forecasting the price of oil is fraught with even more than the usual dangers. Our forecasts for demand are based on the world GDP forecasts on page 8. We also take into account that in and early 2016, actual demand has been depressed below final demand by destocking, which will not continue indefinitely. Supply will be affected by technology and by the ending of sanctions on Iran as well as by any Opec agreements on limiting production. On the technology side, a critical development will be the growth of renewables. Solar developments are likely to account for about half of the new power capacity additions. Fossil fuel usage will have peaked before 2030 We have assumed tentatively that the price of oil will recover from its destocking depressed current level but should rise no higher on average than $70 in the longer term. But if anything, the risk (or in this case opportunity) is mainly on the side of cheaper energy. Of course, since a high proportion of the exported energy comes from the Middle East which seems to be entering a period of even greater political volatility than usual, it is perfectly possible that supply disruptions might occur that would push prices higher for temporary periods. Average of Brent, WTI and Dubai crude spot price, $/barrel, average across calendar year . Source: IMF, EIA, Cebr forecast

Commodity producers finally start to cut supply
World Economic League Table 2016 Commodity producers finally start to cut supply In the medium term the key trend in China regarding commodities will be the rebalancing along with the slowing of growth. Policymakers have managed to increase the success of this recently. With commodity- intensive construction and investment giving way to growth driven by services, growth in demand for industrial metals will be significantly lower. On the supply side, major mining firms have made large losses and are trying to reduce debts accumulated during times of higher prices. Most new projects in the pipeline have already been cancelled and now producers are mothballing existing capacity as well as selling off parts of their operations. These announcements have failed to support prices so far as they come long after the fall began. But they support our expectation of prices bottoming out at some point during 2016. Longer term, India’s role in demand will become increasingly important. News that Modi’s government is taking the lead on infrastructure investment, which is likely to spur the private sector to follow suit soon, should help to drive price gains once markets have stabilised. A strong El Nino is already having large effects on certain agricultural commodity producers. The weather system may be particularly erratic this year, leading 2016 to see price gains in products such as sugar, coffee and cocoa. IMF non-fuel commodity index (2005=100) Source: IMF, Cebr forecast

A focus on domestic markets weighs on trade growth
World Economic League Table 2016 A focus on domestic markets weighs on trade growth During the first decade of the 21st century four factors drove dramatic gains in world trade growth. Industrialisation of previously underdeveloped economies boosted both their exports of industrial products previously made within their Western markets and their imports of energy and raw materials. This industrialisation also promoted rapid GDP growth which accelerated world trade growth through the normal trade multiplier mechanism. Finally, the last surge of energy usage mainly based on fossil fuels promoted international trade in energy. These special factors which drove especially rapid world trade growth are gradually becoming less relevant. World GDP growth is slower than in the past decade and looks set to continue to be so. The transfer of industrial activity to the emerging economies has passed its peak and in some cases gone into reverse. But perhaps the most important change for the future is that emerging economies are shifting their consumption patterns towards services and away from goods, while non fossil forms of energy (which are largely produced close to the point of consumption rather than traded) will lead over time to falling trade in energy. For all these reasons we predict rather weaker world trade growth in the future than in the recent past. World trade, volumes, annual change Source: Netherlands CPB, Cebr forecast

Weakness of European economy to leave $/€ close to parity
World Economic League Table 2016 Weakness of European economy to leave $/€ close to parity Annual average US dollar/euro exchange rate (dollars per euro) US monetary policy is now in the interest rate raising phase of the cycle and we expect short term T bill rates to average 2-3% over the period of this forecast. By comparison, ultra low rates euro rates are likely for most of the same period. There is a key question about whether the euro survives over the next 15 years. Without a common fiscal policy, there is likely to be a deflationary bias in policy, since the solvent economies are hardly likely to – in effect – guarantee the debts of those who in retrospect have over borrowed without some say over these countries’ further borrowing. It remains a possibility that either some countries could leave or the system breaks up. The alternative is a much higher level of fiscal integration within the zone which would in turn imply a much higher degree of political integration. We have assumed that the euro will survive, implicitly assuming a might higher degree of fiscal integration than is currently the case. This will ultimately allow less fiscally deflationary policies in Europe, primarily through encouraging those economies with a strong debt/deficit position to take more fiscal action than has been the case hitherto. Source: Macrobond, Cebr forecast

Americas

US recovery stumbles, but economy remains broadly healthy
World Economic League Table 2016 US recovery stumbles, but economy remains broadly healthy The United States remains the most successful of the world’s older economies and the world’s technological leader. Despite the US’s clear success in technology, which is of increasing importance as Information and Telecommunications software and services and applications are gradually becoming the world’s biggest industry, there are several weaknesses in the US economy which – we believe – will gradually cause its pace of growth to slow to about the average pace for the leading Western economies. The first is migration. The mood against migration into the US is growing (as can be seen with the Trump candidacy for the Presidency). Much of the creativity that is growing the US software industry is based on immigration and as this is increasingly restricted, GDP growth is likely to slow. The second is the impact of excessive litigation. This greatly adds to the cost of doing business in the US. The third is inequality. For many years the US has benefitted from a positive attitude to wealth creation which has prevented government agencies from doing too much damage to business. But the gap between rich and poor in the US (on most measurements) is back to that in Victorian times and looks set to widen. It is unlikely that a consensus in favour of wealth creation can be maintained in these circumstances and more likely that governments will act increasingly to restrict business. This will damage growth and paradoxically almost certainly lead to greater inequality. US real GDP, annual growth Source: IMF, Cebr forecast

Canada looks for a new future based more on skills than resources
World Economic League Table 2016 Canada looks for a new future based more on skills than resources The election of Justin Trudeau to head the new government in Canada suggests that Canadians are tired of the squeeze on tax and spend imposed not only by the Harper administration but also by Treasurer Paul Martin in the Cretien administration previously. This looks odd to outsiders, for whom the previous two governments seemed to have managed magically to square the circle of providing decent public services while holding tax and spending down. The timing of the change in administration is particularly unfortunate with revenues and employment from the extractive industries falling dramatically. The new administration is allegedly looking at increasing the regulations on this sector – again, they could hardly have chosen a worse time. With the political uncertainty engendered by this and the economic uncertainty resulting from the energy and commodity price crash, the strong performance of both the Canadian economy and the Canadian dollar that seemed entrenched a decade ago seems now to be a distant dream. But the country is likely to struggle through, refocussing towards a skills based economy with reduced reliance on natural resources. We still think that – with migration likely to be relatively strong – medium term growth above 2% is likely. Canada real GDP, annual growth Source: IMF, Cebr forecast

Brazil – promise to stay unfulfilled
World Economic League Table 2016 It seems only a short time since the WELT was hailing Brazil’s overtaking the UK economy. A few statistical adjustments later and Brazil now looks set to remain behind the UK at least until 2031 and actually now seems to be on a growth path that would prevent it catching up at all. What went wrong? It is easy to say that the rot started with Left Wing anti business campaigner Dilma Rouseff being elected President in 2011. We’ve identified four reasons why Brazil no longer appears so promising a prospect as it did four years ago (and incidentally four reasons why we ourselves were so wrong!) and Ms Rousseff is only directly responsible for one of them. First, Ms Rousseff proved much more unrealistic than the typical Latin American left winger. She imposed unrealistically low rates of return on infrastructure operators. She meddled in business and imposed an industrial policy described by the Economist as ‘clumsy’. Second, the long term commodity boom came to an end, deleveraging Brazil’s strength in commodity exports. Third an unrealistic fiscal policy, with a widening deficit and even the primary budget excluding debt interest moving into deficit, driven by public sector wages rising much faster than GDP and very much faster than private sector wages. This will have to be curbed and – as the rot is still deepening - will be after 2020 at the very earliest before this problem can be put to bed. Finally the Central Bank prematurely slashed interest rates in 2011/12 at the same time as fiscal rectitude was being abandoned. Now the base interest rate is 14.25% - 2% higher than when they cut. There is a danger that having originally been overoptimistic about Brazil we are now over pessimistic. But we don’t think so. Brazil real GDP, annual growth Source: IMF, Cebr forecast

improving outlook for Mexico
World Economic League Table 2016 improving outlook for Mexico Mexico real GDP, annual growth As Brazil’s star has waned, Mexico’s has waxed. The economic outlook is for a long term growth rate above 3% which at a time of more limited prosperity for emerging economies is quite a result. The single most important factor about Mexico is population growth. This provides the dynamic for growth although it also boosts income inequality. A rapidly growing labour force boosts the competition for jobs and keeps wages down and profits high. The median age of the population is 25.8 years which places it amongst the fastest growing populations in the world. All this would not boost growth on its own however without demand. This is ensured in Mexico by NAFTA, the North American Free Trade Agreement. This allows Mexico free access to the goods hungry markets of the US and Canada. Indeed Mexican wages are now so competitive that significant numbers of US manufacturers are resourcing production from China to Mexico. But the Mexican government is not sitting on its laurels. The government elected in 2012 moved quickly to get interparty agreement on the Pacto por Mexico – a five year programme of pro market economic reform, combined with other measures to limit the growth in inequality. Source: IMF, Cebr forecast

Europe

UK – strong growth but increasing uncertainties
World Economic League Table 2016 The UK is currently the fastest growing major economy in Europe, driven by a fairly cautious pace of fiscal consolidation, the ‘Flat White Economy’ of digital businesses and its reputation as a safe haven for inward investment. By 2040 it may have overtaken Japan and Germany to become the world’s 4th largest economy. The UK is one of the most cosmopolitan societies in the world and this combined with steady government from David Cameron’s fairly left wing conservative party has kept many of the pressures of the modern world from overwhelming economic progress. So what could go wrong? Well quite a lot really. For many years the UK has been a place where outcomes have been predictable and as a result investors have had a high degree of certainty. But in the near future the apple cart could be upset. First growth has been slowing down. The UK is more dependent on the world economy than most countries and is affected by the world slowdown. And the UK’s shortages of infrastructure and housing are increasingly constraining growth. The biggest uncertainty is over the UK’s membership of the EU. A referendum will take place during 2016 and the opinion polls are evenly balanced. A vote either way could be too close to be decisive; a no vote would massively increase uncertainty. The second uncertainty concerns Scottish independence. Although there was a decisive No vote in the last referendum, the strong showing of the Nationalists in the 2015 general election suggests this dragon is not yet slain. Although in theory the loss of heavily subsidised Scotland should be a boost to the rest of the UK, in practice once a country’s territorial integrity is put into question the results are unpredictable. United Kingdom real GDP, annual growth Source: IMF, Cebr forecast

Germany – held back by the burden of supporting the rest of Europe
World Economic League Table 2016 Germany – held back by the burden of supporting the rest of Europe Last year our calculations showed the UK overtaking Germany by This year, with the German economy boosted by a population now expected to be 1.5 million more by 2031 than we had previously assumed, Germany looks set to maintain its lead over the UK well into the 2030s. Most migrants into Germany have been young men of working age – in effect the Germans are receiving people after other countries have borne the burden of educating them. Although there are social pressures and high levels of immigration make a society less cohesive and strain various public services, there is a boost to the economy. The biggest threat to Germany comes from the rest of Europe. The economic problems of most other countries in the Eurozone (only the Netherlands really looks strong enough to be a support to the German economy) mean that in practice they will act as a constraint on German exports. Moreover, making the Eurozone work will probably require a level of fiscal consolidation that involves major transfers from Germany to the other countries on a permanent basis. If Germany were to leave the Eurozone its GDP in international currency terms would shoot up, despite any loss of competitiveness and its impact on exports. Germany real GDP, annual growth Source: IMF, Cebr forecast

France has to decide whether it wants economic growth
World Economic League Table 2016 France has to decide whether it wants economic growth On current trends the French economy is likely to continue sliding down the World Economic League Table. In 2013 France was in 5th position. By 2031 France is forecast to be 9th, overtaken by the UK, India, Korea and Brazil. Indeed one could make a case that this forecast is not sufficiently pessimistic. It assumes unspecified changes that will counteract some of the impacts of persistent slow growth. Yet underfunded pensions, a rising ratio of the non working to the working within the total population, the increasing unsustainability of fiscal policy and a lack of success in growth industries, and a growing underinvestment in infrastructure may mean that the longer term consequences of persistent sluggish growth are even larger economic problems than are incorporated in this forecast. Sadly, many French areas of traditional strength such as food and drink and haute couture are being overtaken by newly emerging rivals. Meanwhile areas of weakness, such as the heavily subsidised agricultural sector, are likely to become a bigger burden on a weaker economy. France real GDP, annual growth Source: IMF, Cebr forecast

Italy’s problems threaten to overwhelm
World Economic League Table 2016 Italy’s problems threaten to overwhelm Italy once claimed to have overtaken the UK to become the 6th largest economy in the world. Updated statistics cast some doubt on whether this ever actually happened. What is now clear is that Italy is predicted to fall precipitately down the world league table. From Italy had no net real GDP growth. Its economy is forecast by 2031 to fall from 8th largest to 13th largest, being overtaken by India, Brazil, Korea, Mexico, Indonesia and Canada. And as with France, this all assumes that steady sluggish growth is achievable. In reality, this assumption could be overwhelmed by the unsustainability of the fiscal position, the cost of social provision for persistent high unemployment, the impact of lack of investment on infrastructure and the impact of the already high dependency ratio increasing further. Italy’s problems are similar to those of France but because the likely rate of growth is so low the problems will exacerbate earlier. On the positive side, any fiscal consolidation of the Eurozone will imply long term fiscal transfers from Germany. But the scope for even this is limited. Italy real GDP, annual growth Source: IMF, Cebr forecast

Poland Poland real GDP, annual growth
World Economic League Table 2016 Poland Poland real GDP, annual growth The newly elected Polish government is probably too populist and nationalist to be strongly supportive of economic growth. But provided it and its successors build on the pragmatic approach of its predecessors, Poland can continue to catch up with the Western economies. Although the position in the league table doesn’t shift much, over the forecast period Poland is forecast to overtake both Switzerland and Sweden. Poland’s most important economic decision has been to stay out of the Eurozone. This has enabled its cheap labour to act as a boost to economic growth. After the period of Communism, Poland suffered ‘shock therapy’ as it adjusted to a social market economy. Growth initially suffered but the economy adjusted and institutions were reformed. It is unfashionable to say so but the tail end of the Communist governments had already started to reform the economy and these reforms helped pave the way for a move to market economies. After growing around 5% per annum for much of the transition phase, our forecast for the maturing Polish economy is for growth to slow to around 3%. This is still a healthy rate and means that the Polish economy will have achieved similar living standards to the Western economies between 2030 and 2050. Source: IMF, Cebr forecast

Switzerland Switzerland real GDP, annual growth
World Economic League Table 2016 Switzerland Switzerland real GDP, annual growth Switzerland’s biggest economic problem – as those that go skiing will know to their cost – is the overvalued Swiss Franc. Our forecasts, which have Switzerland dropping from 20th to 22nd largest world economy assume that a return to more traditional levels of valuation will be possible. If the Franc stays overvalued, Switzerland may do slightly better in the league table but at the cost of making much of its economy uncompetitive. Our forecast assumes that in fact the nominal value of the currency stays roughly constant against the dollar but that the real competitive position of the economy is improved as a result of inflation in Switzerland averaging 1% compared with the 2% more common elsewhere. Because Switzerland has a large finance sector in relation to the economy and hence is subject to violent fluctuations in capital inflows, the currency position is likely to be volatile. Switzerland has relatively low taxes and has many advantages for business as a result of which it benefits from international businesses choosing to locate themselves in the country. We have assumed that this will continue. Source: IMF, Cebr forecast

Sweden Sweden real GDP, annual growth
World Economic League Table 2016 Sweden Sweden real GDP, annual growth Sweden is a relatively unheralded economic success story. Since the mid-1990s, governments of all parties have pursued fiscal austerity by squeezing public spending, permitting a balanced budget and lower taxes. Sweden is one of the European leaders in the Flat White economy, with Skype and Spotify as the two superstar performers. Since the IT sector has grown by 16% and now employs 4% of the labour force. In addition the country has remained competitive in many products and sustains a balance of payments current account surplus. The decision to stay out of the Euro has had less impact than might be imagined because Sweden has kept within the European Exchange Rate Mechanism. A liberal and open trading environment has underpinned the Swedish economy. Provided these trends are maintained, we expect Sweden to sustain growth well above 2% on average, amongst the highest in Western Europe. Despite this, Sweden is likely to drop down the league table as countries in the Middle and Far East overtake. But Sweden in these forecasts remains in the world top 30 and will looking increasingly impressive compared with weakening economies like France and Italy. Source: IMF, Cebr forecast

Spain on long hard road to recovery
World Economic League Table 2016 Spain on long hard road to recovery Spain real GDP, annual growth Spain is now starting to benefit from the fruits of the economic austerity programme it instituted to save its position in the euro. In 2015 Spain grew by nearly 3% - one of the fastest rates in Europe. Despite this the Rajoy government, which had instituted the reforms that stimulated the growth did not benefit during the election. It remains an open question whether the Spanish people have the tolerance for the tough economic decisions necessary to make the economy work. The austerity programme in Spain which has been so successful has not been limited to fiscal consolidations. Particularly important was the labour market reform in 2012 which addressed the imbalance between the cosseted permanent workers (particularly in the public sector) and the temporary workers who had borne the brunt of the economic slowdown. Making it easier to fire workers increased investor confidence. In addition the number of procedures necessary to start a business was reduced from 10 to 6 in 2013 and 2014. The result has been that Spain has moved up the World Bank’s ease of doing business rankings from 52nd in 2012 to 33rd in Some of the Spanish bounceback reflects the scale of the previous downturn and growth in future will be limited by the loss of skills during the downturn. Spain is likely to drop from 13th place in the WELT ranking in 2014 to 17th in 2031. Source: IMF, Cebr forecast

Lack of international investment keeps Russian growth low
World Economic League Table 2016 Lack of international investment keeps Russian growth low Russia declined from 10th to 15th position in the world economic league table between 2014 and The combination of a falling oil price and a falling rouble were the main causes. In addition real GDP has dropped by about 4%. Although Mr Putin has claimed that the worst is over, this seems unlikely. We expect a budget deficit of 7% of GDP this year which should exhaust the contingency fund. Although the weak rouble has meant that Russian labour is now cheaper than Chinese labour, this has failed to attract inward investment, put off by the Russian tendency to treat foreign investors badly. Meanwhile the number in poverty has roughly doubled to 40%. Because we assume that the price of oil will gradually recover after 2016, we expect that growth will eventually return. But low investment and an increasing infrastructure backlog mean that even with higher oil prices growth will remain sluggish and living standards depressed. We therefore do not expect that the Russian economy will regain any places in the WELT. Russia real GDP, annual growth Source: IMF, Cebr forecast

Turkish growth is held back lack of economic reform
World Economic League Table 2016 Turkish growth is held back lack of economic reform Turkey real GDP, annual growth Increasingly autocratic rule by Mr Erdogan and his ruling party are removing the gloss from Turkey’s economic miracle. Despite Angela Merkel making formal offers to Turkey to join the EU, it is unlikely that this can happen any time soon. Meanwhile economic reform has gone into reverse. Rising public spending is threatening Budget discipline, while overgenerous social security and failure to reform the labour market means that Turkey’s competitive advantages are gradually being eroded. Add to this the cost of Syrian refugees and the cost of maintaining a huge military and it is clear that Turkish businesses have a heavy burden of additional cost to support. Looking forward, the gradually Islamisation of the country is potentially a problem – it is likely to put off Western investors at a time when Islamic investors are facing problems from the weak oil price. Growth is likely to slow to below 2% as these problems start to influence the pace of the economy. Source: IMF, Cebr forecast

Asia and Australia

One arrow not enough to reflate Japanese economy
World Economic League Table 2016 One arrow not enough to reflate Japanese economy Japan real GDP, annual growth While the league table only shows Japan losing one place as India overtakes in 2022, in reality Japan’s economic performance is one of the worst of the developed nations as a declining population, slow productivity growth and a weaker exchange rate take their toll. At some point between 2030 and 2040 both the UK and German economies are likely to overtake the Japanese economy.. Japan’s working age population peaked at 87.3 million in 1995 and has now fallen to 78 million in The decline is expected to continue. As a result the labour force – now 65 million, is forecast to decline to 40 million by 2060. Not only is the labour force forecast to decline but – with more marginal groups being forced to enter employment – productivity growth in the country is expected to remain virtually non existent. This is why the economy is forecast scarcely to grow at all in the coming years. Source: IMF, Cebr forecast

Policymakers in China have enough ammunition for now but next cyclical downturn could be hard to manage By 2029 China will be safely positioned as the world’s largest economy. But its progress in that direction is now likely to be slightly slower than we had expected last year as a result of two factors – slower growth as the country transitions from- export led growth to consumer based growth; and a weaker renminbi as the country adjusts its exchange rate strategy to reflect China’s positioning of the renminbi as a reserve currency. While China faces the problems of trying to change gear, these are not unprecedented problems for other societies. Perhaps the greatest difficulty for China is that because it industrialised at breakneck pace, the scale of economic imbalances that emerged is especially large. These problems will need to be addressed as the Chinese economy evolves. It is likely that there will need to be political transition to keep pace with the economic transition. Yet the authorities feel that they need to keep control as the economy requires tough decisions and reorientation. Meanwhile, although our own analysis suggests that the economy starts 2016 with very little growth, we believe that the authorities have enough ammunition with both fiscal and monetary policy to bail out the economy one more time. However we believe that they may have much more difficulty in curbing volatility in future. A combination of economic and political volatility is the greatest potential problem for China. China real GDP, annual growth Source: IMF, Cebr forecast

India set to lead major emerging economies
World Economic League Table 2016 India set to lead major emerging economies The world’s most populous nation has made a start in in catching up with China, with faster economic growth than China for the first time in recent years. But there is still a long way to go and India is only likely to overtake China at some point in the second half of the 21st century. India will however become the largest economy in the Commonwealth in 2019 when its economy overtakes the British economy. India is also likely to force its way into the exclusive G-8 group of the world’s leading economies. The global business community is disappointed that the Modi government’s economic reform rhetoric has not been matched by action so far. But optimism about India’s long term success is rising. India imports more commodities relatively than any other of the emerging economies and low prices for both energy and other commodities benefit India. The main constraint on Indian growth is lack of all kinds of capital from human skills to physical infrastructure. This is partly why India’s growth is biased towards less capital intensive sectors like software. Meanwhile, labour force growth keeps wages low while population growth feeds consumption. So India stays competitive while at the same time demand rises. India real GDP, annual growth Source: IMF, Cebr analysis/forecast. Pre-2012 figures are Cebr estimates comparable with India’s revised GDP series (re-based to and published from 2011/12).

Korea Korea real GDP, annual growth
World Economic League Table 2016 Korea Korea is forecast during the next 15 years to join the big boys of the world economy, rising from 14th place in the league table in 2014 to 7th in 2031. This growth should lead to membership of the exclusive G-8 grouping of the world’s leading economic nations. Korea’s success is based on manufacturing strength but will increasingly be based on technology. It also has an electorate, a civil service and a government that believes that business is good for the economy. Meanwhile Korea’s population is aging – the proportion over retirement age will rise from 13% now to 34% by 2040 – as a result of an oversuccessful population control policy. But Korea has a hidden advantage. Currently on average most Koreans stop work in their early 50s. As the population ages there is considerable scope for this age to rise with a consequent increase in the labour force. It is for this reason that we believe that international forecasts that Korean growth will slow dramatically to around 2% are very much overblown. We expect growth to sustain itself above 3% for most of the next 15 years and to slow down only in the 2040s. At some point in the next 20 years the North Korean economy should implode. While this could create political volatility, reunification seems more likely if a suitable accommodation can be made with the Chinese government. Korea real GDP, annual growth Source: IMF, Cebr forecast.

Indonesia Indonesia real GDP, annual growth
World Economic League Table 2016 Indonesia As Indonesia manages to continue economic reform after the change in government, fears that its impressive economic growth might grind to a standstill have proved groundless and the economy has even withstood the Chinese economic slowdown and the backlash to the US interest rate rise. Forest fires and toxic haze remain a dampener on the economy and have also affected neighbouring Malaysia. Indonesia rises from 17th position in the league table in 2014 to 11th position in 2031. The Indonesian economy appears to have grown by 4.7% in 2015, about a percentage point short of government targets. Weak consumption and investment have been the major causes. The Budget deficit at just under 3% of GDP will constrain future economic policy. A weak oil price affects government revenues. But Indonesia is still attracting inward investment and arguably its ability to keep the economy stable against a background of weak energy and commodity prices, the US rate rise and a slowing Chinese economy indicates the underlying resilience. We believe that as energy and commodity prices stabilise and start to recover, even though sluggishly, Indonesian growth should pick up. Strong labour force growth should both keep wages competitive and boost demand. Indonesia real GDP, annual growth Source: IMF, Cebr forecast.

Philippines Philippines real GDP, annual growth
World Economic League Table 2016 Philippines The economy of the Philippines is expected to see one of the most impressive moves in the WELT, from 40th place in 2014 to 19th place in Despite some recent hits from severe natural disasters, the fundamentals of strong demographics, a force for urbanisation, and close links to the US and the rest of ASEAN should help it see rapid development. The Philippines population has more than doubled from 48 million in 1980 to an estimated 102 million today. It is still estimated to be growing at 2% per annum. The median age is just over 23, implying substantial labour force growth over the next 20 years. This population growth is driving competitive wages and rising demand. The economy has grown by about 6% per annum and growth is likely to continue to exceed international norms. The Philippines specialises in Business Process Outsourcing which contributes nearly $30 billion a year to the economy. It also benefits from remittances from Filipinos working abroad who remit roughly as much. The service sectors seem to be less affected by the international economic slowdown than trade in goods. We expect the pace of economic growth to exceed 5% until well into the 2020s driving the country’s move up the WELT. Philippines real GDP, annual growth Source: IMF, Cebr forecast.

Taiwan Taiwan real GDP, annual growth
World Economic League Table 2016 Taiwan Taiwan real GDP, annual growth Increased linkages with its economic neighbourhood should help Taiwan climb up the ranks of the WELT from 26th place in 2014 to 23rd place in 2031. Taiwan is the leading supplier of contract computer chips in the world and is one of the leading suppliers of LCD panels. It has grown at an annual rate of 8% for the past 3 decades and is now categorised as an advanced economy. Population growth has slowed to 0.4% and as a result, like many Asian countries, Taiwan faces an aging population. This will constrain both competitiveness and growth. The key challenges for Taiwan are to adjust to the inevitable loss of manufacturing jobs as many of those that exist currently migrate to cheaper locations. Taiwanese wages are likely to rise in real terms and the labour force will have to upskill itself in the knowledge industries for rapid economic growth to continue. A key risk for Taiwan is that the persistent diplomatic war with China turns into something more serious. As it is, Taiwan is one of the world’s heaviest spenders on military equipment, which acts as a burden on the economy. Conversely, if the country were to reach an accommodation with China, the peace dividend could spark faster growth. Source: IMF, Cebr forecast.

Malaysia Malaysia real GDP, annual growth
World Economic League Table 2016 Malaysia Malaysia real GDP, annual growth The forces behind Asia’s emergence as a fast-growing spot in the global economy such as strong demographics, regional integration, and a move up the value chain as China itself becomes more of a services-based economy are expected to help Malaysia see an important rise up the ranks from 35th place in 2014 to 24th in However not all the signals are rosy. Racial tensions between Malaysia’s three main ethnic groups, the majority Malays, the Chinese and the Indians have led the Chinese government to make an official protest to the Malaysian government. The same factors have led to an exodus of many of Malaysia’s most skilled people. Malaysia’s economic plan is called the New Economic Model (NEM) and aims at achieving high income status for the economy by The country has succeeded in introducing the major fiscal reforms required – a Goods and Services Tax has broadened the tax base while most subsidies for key goods have gradually been eliminated. Yet inward investment has been below the rate required to hit official targets and on our forecasts the country will only achieve high income status closer to 2030 than 2020. Source: IMF, Cebr forecast.

Thailand Thailand real GDP, annual growth
World Economic League Table 2016 Thailand Thailand real GDP, annual growth Thailand’s economy is forecast to see a marginal improvement in its global economic rank, in line with the broader trend of strong economic growth in Southeast Asia. Despite some troubles in the short run such as capital outflows in the face of the Fed rate hike and a knock-on effect from China’s slowdown, the fundamentals remain strong. The Thai population is increasing at the relatively slow rate of 0.3% per annum and as a result is aging despite both legal and illegal migration. The country currently has reached a level of GDP per capita about half that of Malaysia, which in turn is about half those of Korea and Taiwan. Political problems are holding back Western investment although they do not seem to be having much impact on Chinese investment. Because there is still plenty of scope for catchup we would expect to see growth sustained at over 4%. This should sustain a slight move up the WELT rankings from 30th in to 28th in 2031. Source: IMF, Cebr forecast.

Hong Kong SAR Hong Kong SAR real GDP, annual growth
World Economic League Table 2016 Hong Kong SAR Hong Kong SAR real GDP, annual growth Being Asia’s most important financial hub, Hong Kong is expected to benefit considerably from China’s rebalancing into more of a services-driven and consumer-oriented economy, and also from the rise and internationalisation of the renminbi. Despite London’s efforts to become the most important financial hub for the renminbi, Hong Kong is also well placed to take advantage of this development given its strong ties to mainland China. Given all this, we see it as one of the most impressive players in the league table, moving up from 38th place in 2014 to 30th place in 2031. Hong Kong has the highest degree of economic freedom in the world and as a result is extremely attractive to inward investment. Its stable currency also reduces investors uncertainty. Hong Kong’s biggest weaknesses are microeconomic. The domination of a limited number of property owners and financial institutions has meant that land is in scare supply and housing is as a result the most unaffordable in the world. This pushes up the cost of living and so means that for many workers a disproportionate amount of their pay packet goes into housing. While it is true that Hong Kong has a limited amount of land available, planning restrictions on what land there is have restricted the supply of accommodation. Lack of competition in finance is also restricting financial innovation also constraining growth. Source: IMF, Cebr forecast.

Australia Australia real GDP, annual growth
World Economic League Table 2016 Australia Australia real GDP, annual growth The forecasts show Australia dropping from being the world’s 12th largest economy in 2014 to its 15th largest in In reality, this is almost entirely due to the weakness of the world’s markets for energy and minerals over the forecast period and the underlying performance is rather better than the position in the league table suggests. Meanwhile the changing ethnic composition of the population, despite strict migration controls, means that the ‘we’re off to the beach’ attitude to working of many urban Australians will be challenged while diversity will boost creativity. The Australian population has growth from 14 million in to 24 million at the beginning of Of these, 28% were born outside Australia. The population is still growing at close to 2% and is expected to be close to 30 million by 2031. While governments have toyed with autarkical policies, in recent years the pressures for liberalisation have been stronger and as a result the economy has performed relatively well. We expect continued growth in real GDP per capita , boosted by gas production in West Australia and by continued diversification of the economy towards knowledge based industries. Source: IMF, Cebr forecast.

Middle East and Africa

Saudi Arabia Saudi Arabia real GDP, annual growth
World Economic League Table 2016 Saudi Arabia Saudi Arabia real GDP, annual growth The outlook for the Saudi economy is heavily based on the outlook for oil. As oil prices are forecast to pick up from their current lows we forecast an improvement in Saudi Arabia’s global rank on the WELT. However, as prices are expected to remain relatively weak with any improvement fairly marginal, and given Saudi Arabia’s poor performance when it comes to diversification, our forecast for the level of its GDP in dollar terms is actually lower than what was expected in last year’s report. The Saudi population grew from under 10 million in 1980 to over 30 million in But population growth has slowed and the population is expected to reach only 40 million by 2050. Educational performance is still disappointing which is one reason why the economy has failed to diversify towards the knowledge economy. There appears to be some success in diversifying the energy sector towards solar power. But the economic effects of the decline in the oil price have not yet been fully absorbed and will constrain growth for many years, even if the price recovers. Source: IMF, Cebr forecast.

UAE UAE real GDP, annual growth
World Economic League Table 2016 UAE UAE real GDP, annual growth After some weak years from low oil prices and a weak property sector the UAE are expected to see some stronger growth fuelled by the fruits of diversification and the rapid development of Dubai and Abu Dhabi, helping it rise from 31st place to 27th. Although the UAE has been hit by the declining price of oil it the negative impact of this is partly offset by its success in diversification particularly in Dubai. This has been driven by the investor friendly climate, evidenced by the UAE’s rising score for the Index of Economic Freedom. The country is now ranked second in the whole of the Middle East and North African region for economic freedom and this is reflected in the scale of inward investment. The government is reacting to the low energy prices by reducing energy price subsidies and using the money to finance infrastructural development. In the medium term, education will be important in determining the scale of diversification into knowledge based industries. Here the UAE compares favourably with a mid table ranking compared with its neighbours Qatar, Oman and Saudi Arabia all of whom are ranked in the bottom 10 countries for education. Source: IMF, Cebr forecast.

Nigeria Nigeria real GDP, annual growth
World Economic League Table 2016 Nigeria After overtaking South Africa’s economy the Nigerian economy is expected to slip down a few places (yet still remain ahead of South Africa as the world’s 25th largest economy). This is mainly because of a weaker outlook for oil prices – an important export for Nigeria. The Buhari administration proposes to hold down the budget deficit to 2.2% of GDP with economies in administrative costs. At the same time spending on infrastructure is set to rise sharply, financed by improved revenue collection. The improved infrastructural spending is likely to be focussed on transport, housing and power. Medium term, economic growth is forecast to be driven by demographics. The current population of 180 million is forecast by the UN to grow to 440 million by 2050, making it by then the 4th largest population in the world. In the coming years an increasing proportion of the rapidly growing population is likely to enter the labour force keeping wages low while at the same time boosting consumption. Provided that the economy can maintain its relatively pro- business stance, the demographic dividend should translate into really dynamic economic growth. Risks are essentially political, especially with Boko Haram attempting to disrupt the North of the country. Nigeria real GDP, annual growth Source: IMF, Cebr forecast.

Special Focus: Iran, Israel and Sri Lanka

Iran Iran real GDP, annual growth
World Economic League Table 2016 Iran Iran real GDP, annual growth After years of crippling economic isolation, Iran is emerging as a bright spot in the global economy. The lifting of sanctions, a more moderate political regime, and strong demographics and other socioeconomic factors help it rise up the ranks of the WELT from 29th place in 2014 to 26th in This is a considerable revision from our forecast two years ago that saw Iran reach 55th place by A fuller analysis of Iran’s economy is provided in Cebr’s special Iran report, available on our website. The key point behind Iran’s likely recovery once sanctions have ended is the demographic push. Iran’s large and growing educated population is one of the most potentially dynamic in the world. Combined with ultra low wages for most skilled employees, the prospect is for a competitive economy to emerge. Of course this will not happen immediately and there is no guarantee that political instability might not turn over into a cause of economic instability in some way. But given reasonable luck the economy should emerge to start growing faster than 3% per annum by the mid 2020s. Source: IMF, Cebr forecast.

Sri Lanka’s GDP to continue to grow rapidly as economy catches up
World Economic League Table 2016 Sri Lanka’s GDP to continue to grow rapidly as economy catches up Sri Lankans currently have an average life expectancy of 74 and an adult literacy rate of over 92%. So the GDP per capita level of approximately $3,600 is surprisingly low, given the high quality of health and education. By comparison, countries with similar a GDP per capita, such as Guatemala and Egypt, have far lower rates of adult literacy (79% & 75% respectively), and lower levels of life expectancy (71 in both counties). Our theory is that the GDP levels in Sri Lanka have been depressed by the 30 year civil war between the majority Singhalese and the minority Tamils. Since the conflict ended in 2009, Sri Lanka has experienced unprecedented levels of economic growth. Boosted by heavy Chinese investment in infrastructure and roads, and fresh Government focus on export-led growth, we predict Sri Lankan real GDP to grow at an average of 6.3% per annum to Export diversification into medium-to-high technology manufacturing, reflected by Volkswagen’s recent agreement to invest in the construction of an assembly plant, will boost Sri Lanka’s output and lay a foundation for more FDI, driving economic growth in the near future. Ongoing ethnic tensions could be a threat to both Government and economic stability. Over-dependence on an increasingly vulnerable export-base of commodity exports and textiles may also dampen economic growth potential. Sri Lanka real GDP, annual growth Source: IMF, Cebr forecast.

Israel Israel real GDP, annual growth
World Economic League Table 2016 Israel Israel real GDP, annual growth We expect Israel to break through to a level of GDP per capita above much of Western Europe during the next 15 years as software becomes the mainspring of the Israeli economy. Technology already accounts for 9% of all jobs in the economy – twice the share of Sweden for example – and this is set to grow. Although Israeli economic growth in 2015 slowed to 2.3% against the background of political instability. But growth is expected to accelerate as the benefits of a favourable investment climate start to show through. In addition natural gas production later in the current decade is predicted to boost growth. Economic reform in Israel has boosted its position in the world’s economic freedom indices issued by the Heritage Foundation. Improved property rights and deregulation have made the business sector less dependent on government. Longer term growth will ultimately be dependent on Israel’s ability to reach an accommodation with its neighbours. With many of these more at war with each other than with the Israelis, it is conceivable that the time is propitious for such deals to be made backstage although with Islamic extremism such a potent force, an Arab government would have to be extremely brave to make a public deal with Israel. Source: IMF, Cebr forecast.

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