The US is about to lose its title as the world's biggest economy
America may have got used to the power and status that comes with having the biggest economy in the world. However, it should enjoy it while it lasts, because experts have revealed that it is set to lose its crown within the next few years.
The shift of power was discussed in a Deutsche Bank note to clients, reported by Business Insider. In it, Jim Reid, Head of Global Fundamental Credit Strategy, compared the US to former dominant economies which have lost their power - including the British Empire. He said: "Based on current trends China's economy will overtake America's in purchasing power terms within the next few years."
This reflects estimates from the OECD which puts the change at 2016, and official figures in China which estimate it will happen in 2017. It's earlier than some other commentators expect. The Centre for Economics and Business research puts it at 2028, while IHS estimates it will hit in 2024 as domestic consumer spending drives the trend.
Rajiv Biswas, Chief Asia Economist at IHS added: "As incomes rise, Chinese households no longer need to save such a high proportion of their incomes for such contingencies as health care and retirement savings, allowing a higher proportion of income to be allocated for consumer spending."
Reid argued that the shift in relative power wasn't a sign of any particular malaise in the US, but the unwinding of an anomaly. The sheer size of China meant that prior to the industrial revolution it was clearly the dominant creator of world GDP. It was only when the revolution catapulted western countries ahead that the balance shifted. China's developments in the last 30 years mean it's naturally closing the gap again.
Does it matter?
There are those who argue that the precise point at which China becomes bigger than the US doesn't really matter, because we have been feeling the effects of China's growth for some years now. The demand for commodities in China has been pushing energy prices up worldwide, while the growth in Chinese exports has depressed global prices for manufactured goods. China has also been driving global growth since the financial crisis: since 2007 the world economy has grown just under a third - and China has been responsible for about a third of it.
There are experts who point out that the real impact is likely to come a little further down the line. Economic expansion will lead to growth in defence budgets, which will increase China's military influence in the region and then the world. After that, the world's largest economy will be called on for development aid and financing across the developing world - which will increase it's global political clout too.
However, there are others who say we shouldn't be too hasty, and that behind the headline figures China has been growing weaker. Excessive borrowing, wasteful building schemes producing empty buildings, and ill-conceived infrastructure projects are a sign that the country could be heading for a financial crisis of its own.
But what do you think? Does size really matter?
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