Emerging markets will dominate long-term growth: Study

The so-called “E7” economies, which include the BRIC nations of Brazil, Russia, India and China, along with Indonesia, Mexico and Turkey, will have the most consistently high growth rates between now and 2050, a new study by PricewaterhouseCoopers concludes.

The study, entitled The World in 2050: Beyond the BRICs: A broader look at emerging market growth prospects, says the E7 countries will experience growth rates between now and 2050 that outpace G7 nations by 50%. China is expected to overtake the U.S. as the world’s largest economy by 2025, and PwC predicts India will just about pull even with the U.S. by 2050.

PwC adds that Brazil’s economy will likely overtake Japan’s by 2050 to become the world’s fourth largest, while Russia, Mexico and Indonesia all have the growth potential to surpass the economies of Germany and the U.K.

While the rise of these nations means that the economic heft of the G7 economies will diminish, PwC also notes that it will create new investment opportunities, particularly for services and export businesses.

One of the more interesting metrics used in the study is GDP growth in purchasing power parities (PPP) — effectively a measure of how much the emerging economies can purchase relative to other economies. Many emerging economies experience large GDP growth, but if their wages and labour costs are low, their effective purchasing parity can lag GDP growth. By 2050, this is expected to substantially change so that some of the E7 nations will become major consumer hubs.

In the case of China, PwC estimates its GDP PPP will rise from 51% of that of the U.S. in 2007, to 129% in 2050. The study also breaks down these figures into per capita dollar figures, which gives a very loose sense of the purchasing power of individual consumers in each nation.

In constant 2006 dollar terms, it is estimated the per capita GDP PPP of residents of China will increase from $5,200 to $34,500 by 2050. In India this figure will rise from $2,500 in 2007 to $19,900 in 2050.

Being invested in or exporting to these countries could pay off handsomely, particularly for Canadian companies, says Ed Mansfield, head of the economics practice for PricewaterhouseCoopers Canada.

“As the economies of emerging nations grow, Canada’s share of the global economy is projected to diminish,” Mansfield says. “To maintain our competitive position, Canadian businesses will have to differentiate through innovation and technological progress. This will require greater investments in education and capital equipment to promote the productivity gains necessary for economic growth. However, as a highly culturally diverse nation, Canada could be well positioned to capitalize on the growth of emerging markets due to well-established cultural and economic links.”

The study notes the types of companies best suited to profit from emerging market growth are retailers, leading global brand owners, media companies, niche high-value-added services, energy and utility companies, education and healthcare providers and financial services companies able to penetrate the emerging markets.

Canada and the U.S. seem well positioned to grow these businesses. According to PwC’s projections, both countries are on pace to double their GDP per capita in PPP terms to have the highest purchasing power per capita in the world. America’s per capita GDP PPP is expected to grow from $44,400 in 2007 to $93,300 in 2050, in constant 2006 dollars. Canada should rise from $39,200 to $83,300 over the same period.

Mansfield says Canada’s ability to grow the types of businesses that will succeed in the emerging economies is dependent on companies’ making a substantial investment in education, research and development so they can develop and maintain quality products and services that appeal to the more affluent consumers of those markets.

The study also notes that it’s not just the E7 that need to be targeted for business investment. Other nations like Vietnam and Nigeria are projected to be growth leaders over the coming decades.

Vietnam is expected to have annualized growth of 10% per annum until 2050. PwC expects it to use a younger and cheaper labour force to build up its manufacturing base in a similar fashion to what China has done.

“Vietnam is a very interesting story. I think by about 2050 they would be approaching the size of the Canadian economy, maybe a little bit less,” Mansfield says. “There is definite opportunity for Canadian businesses to be looking at Vietnam.”

Nigeria’s economy is expected to grow by 8% a year to overtake South Africa as Africa’s largest economy.

Mansfield warns that investment in non-E7 emerging economies must be tempered by the fact that some of the countries are susceptible to political instability, which could easily derail growth projections.

“With both Nigeria and Vietnam, there is the caveat that these projections require that political assumptions will be stable,” Mansfield says. “Before businesses invest in these countries, they need to be sure those assumptions will continue.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(03/25/08)

Mark Noble