NOVEMBER 2004

Projections for Global Growth

Providers of retail financial services have increasingly been looking beyond the borders of the United States for new growth opportunities. A fascinating new research study from economists at Goldman Sachs offers some powerfully positive observations about where that growth is most likely to occur. In a research paper titled The BRICs and Global Markets: Crude Cars and Capital, the case is made that four countries in particular—Brazil, Russia, India and China—could be a major source of global economic growth within ten years, and perhaps the dominant source in twenty (Goldman Sachs Global Economics Paper No. 118, available at https://portal.gs.com)

The paper builds on the analysts' prior work which attempts to project the influence that these four largest emerging economies, the BRICs, could have on global demand and global spending over the next 50 years. The authors' latest work concludes that the continued rise of the BRICs could well result in a "seismic shift" in the world economy over the next few decades, faster than they originally predicted. Some highlights of their conclusions follow.

• Over the next few years, the continued industrialization in China and India could push the trend world growth rate above 4%, and for at least another decade it could remain above the average world economic growth rate of 3.7% that has prevailed over the last 20 years.

• China could overtake the United States as the world's largest economy in a little over 30 years. Of the current G6 economies (U.S., UK, Japan, Germany, France, Italy), only the US and Japan may be among the six largest economies in 2050.

• Individuals in the BRICs are still likely to be poorer on average than individuals in the G6 economies. However, the number of people with income over $3,000 in the BRICs—the World Bank's standard for entry into the middle class—could nearly double in the next three years. Within a decade, over 800 million people across the BRICs may have crossed over that threshold, a number greater than the combined population of the US, Western Europe and Japan. By 2025, there could be more than 200 million new people in these economies with incomes above $15,000, up from a very small percentage today.

• The impact of the BRICs will follow a sequence, exerting increased pressure on commodities demand first, followed by consumer durable goods, and finally global capital markets.

The Goldman Sachs study highlights the BRICs impact on automobile demand as an example of what will be happening to demand for a host of consumer durable goods. This should have consumer lenders salivating, since the availability of suitable financing will be necessary to translate growing demand for consumer durables into rising sales.

• The annual increase in the number of cars on the road in the BRICs is projected to be larger than or comparable to that in the US in each of the BRICs within a little more than a decade, especially in China and India.

• Within 20 years, China is likely to overtake the US as the world's largest auto market, with India displacing the US as soon as 15 years later.
• Russia could be the sleeper in the projections. Over he next decade the number of cars on the road in Russia could double and may become comparable to Japan.

The report's authors admit that their projections are just that, and each of the BRICs faces unique challenges in transforming the projections into reality. They write: "Out of the four economies, China "shows the most encouraging signs across a broad range of conditions needed to support our projections." But, China needs to shore up its financial system. Both Brazil and India need to improve their infrastructure and education levels. Russia must transform its economy away from heavy reliance on the sale of commodities and toward more broad based output. "The BRICs do not need to register 'miracle' growth, but they do need to remain on a steady track in maintaining these necessary conditions for convergence [with productivity growth in developed countries] to take place."