Prediction: 2040's Top 8 World Economies

By David Sterman
August 05, 2011

Americans are hardly feeling contented these days. Washington is a mess, jobs are scarce, our soldiers are in harm's way, and the weather's gone wild. But at least the United States is still the largest economy in the world -- we'll always have that.

Right?

Actually, no. After all, other countries are in the midst of a dynamic growth spurt, threatening to eventually end our economic hegemony.

But there is a bright side to our eventual fall from the economic peak. Our trading partners are starting to consume an increasing amount of our goods and services, which may help us become an export powerhouse by later this decade.

The question for investors: Which countries will dominate the trade flows in coming years? We can all guess which country looks poised to gain the top slot (hint: it's got more than one billion people), but you may be surprised to see which other economies will eventually take key roles in the global market place.

I've developed a back-of-the-envelope look at the projected size of Gross Domestic Product (GDP) for the next 30 years, simply by extrapolating current growth rates and then tossing in a few variables. Countries like China and Brazil will be hard-pressed to sustain their current scorching growth rates, but should still grow at an above-average pace. Simply put, rising middle classes spur a virtuous cycle of sustained growth as ancillary industries grow and prosper, catering to an expanding appetite from the consumer class.

How can one actually predict how fast an economy will grow in coming years?

  • Well, we can look to existing purchasing power as one metric. It's been relatively costly to do business in the U.S. compared to places like China, so millions of manufacturing jobs have been created in China over the last two decades while few were created here. The U.S. is still relatively expensive, though less so than before, but by this measure, China looks poised to continue growing at fast pace.
  • Also, take note of current middle classes and their potential to expand. A much higher percentage of Chinese citizens will move up to the middle class in coming years, compared to more advanced economies, which gives China, and other emerging economies more ground to cover, and thus higher growth potential.
  • Natural resources, managed well, can really boost GDP. Look at small countries like Norway and Saudi Arabia. Their vast oil deposits have led to relatively high per capita GDP rates. Looking ahead, countries like Australia, Canada and Russia can count on a similar boost.
  • Demographics. Some countries such as Italy and Japan are old and getting older. That's likely to greatly impede their long-term growth potential, and their economies may eventually cease growing altogether.

Using these variables, I have projected growth rates for a range of countries. For example, I've assumed that the U.S. economy grows 2.3% in perpetuity, thanks to off-setting headwinds and tailwinds. In contrast, I expect Chinese economic growth to slowly decelerate, from 8% in 2010 to 6% in 2015, and then maintain that pace for the next few decades. Actual growth from year to year is bound to be much more erratic, but these assumptions look like safe bets for the long-term.

Here's a look at the top eight economies at five-year intervals from 2015 to 2040:

Future Top Economies in the World InvestingAnswers

That's not a happy forecast for Japan, which is projected to drop a slot every five years or so. Perhaps the seemingly inevitable decline will lead to a national soul-searching that helps re-invigorate the country, as was the case after World War II.

And there's a chance Russia won't ever crack the top eight, if corruption and economic efficiency more than offset the gains associated with the country's vast natural resources. Looked at another way, if Russia really got its act together and became more closely tethered to the global economy, then it may end up doing even better than my projections.

The Investing Answer: Here in the U.S. it may prove to be a blessing to lose the economic leadership position. We've been living off the fruits of other countries' labor for many years, and a more independent fiscal path where we make more of our own products and import less from elsewhere may not be such a bad thing. A return to our roots as a manufacturer of goods would provide numerous ancillary benefits to our economy in terms of employment, trade flows, tax revenues, etc.

Nonetheless, expect to hear plenty more about our "lost superpower status" in coming decades.