Winners and losers in the global economy
Global growth seems to be holding relatively steady, but beneath the surface the Trump administration and China’s struggles are set to usher in a new, more mercantilist era for the global economy. Trade disruption, volatility in prices and a new policy mix will determine the winners and losers. The U.S. is set to outperform consensus expectations and its advanced economy peers for 2025. But the gains from strong U.S. demand will be tempered by the increasingly costs of trade disruption, tighter financial conditions, and heightened geopolitical risk.
Will the global economy see a resurgence in inflation or a return to sustained low inflation? Exchange rates, energy prices, import prices, and financing costs are all likely to keep fluctuating given the ongoing geopolitical uncertainties. How will fiscal and trade policies influence economic growth? Policy rate cuts won’t provide much of a boost to growth next year. Instead, the U.S. administration’s fiscal and trade policies and the reactions they elicit from China and the EU are likely to drive diverging sectoral fortunes.
Central banks like China have been buying up a ton of gold. And the reason behind that is traditionally people have looked to the U.S. dollar as a rock-solid reserve asset. But now that the government debt is so high, debt/GDP ratio of about 120%. There are some questions about whether that is really sustainable. And the perception of the U.S. dollar as a rock-solid reserve asset has started to shift a bit, and central banks like China and other countries have been buying gold instead. It is also worth pointing out that some retail asset flows to gold ETFs as maybe a second factor that was supporting the big runup in gold prices. Some of the main factors behind that would be just ongoing concerns about overall macroeconomic instability, the potential for rising inflation, and other related issues.
The international system is almost unrecognizable by 2025 owing to the rise of emerging powers, an historic transfer of relative wealth and economic power from West to East, and the growing influence of nonstate actors. The international system is becoming more of a global multipolar one with gaps in national powers continuing to narrow between developed and developing countries. Concurrent with the shift in power among nation-states, the relative power of various nonstate actors, including businesses, tribes, religious organizations, and criminal networks, is increasing.
Historically, emerging multipolar systems have been more unstable than bipolar or unipolar ones. Strategic rivalries are most likely to revolve around trade, investments, and technological innovation and acquisition, but one cannot rule out a 19th century-like scenario of arms races, territorial expansion, and military rivalries.
Although the United States is likely to remain the single most powerful actor, the U.S. relative strength, even in the military realm, will decline and U.S. leverage will become more constrained. In terms of size, speed, and directional flow, the transfer of global wealth and economic power now under way, roughly from West to East, is without precedent in modern history.
Growth projections for Brazil, Russia, India, and China (the BRICs) indicate they will collectively match the original G-7’s share of global GDP by 2040-2050. China is poised to have more impact on the world over the next 20 years than any other country. India probably will continue to enjoy relatively rapid economic growth and will strive for a multi-polar world in which New Delhi is one of the poles. China and India must decide the extent to which they are willing and capable of playing increasing global roles and how each will relate to the other. Russia has the potential to be richer, more powerful, and more self-assured if it invests in human capital, expands and diversifies its economy, and integrates with global markets. On the other hand, Russia could experience a significant decline if it fails to take these steps and oil and gas prices remain in the $50-70 per barrel range.
Many other countries will fall further behind economically. Sub-Saharan Africa will remain the region most vulnerable to economic disruption, population stresses, civil conflict, and political instability. Despite increased global demand for commodities for which Sub-Saharan Africa will be a major supplier, local populations are unlikely to experience significant economic gain. Windfall profits arising from sustained increases in commodity prices might further entrench corrupt or otherwise ill-equipped governments in several regions, diminishing the prospects for market-based reforms. Although many of Latin America’s major countries have become middle income powers, others, particularly those such as Venezuela and Bolivia that have embraced populist policies for a protracted period, will lag behind.
Resource issues will gain prominence on the international agenda. Unprecedented global economic growth will continue to put pressure on a number of highly strategic resources, including energy, food, and water, and demand is projected to outstrip easily available supplies over the next decade or so.
The trend toward greater diffusion of authority and power that has been occurring for a couple decades is likely to accelerate because of the emergence of new global players, the worsening institutional deficit, potential expansion of regional blocs, and enhanced strength of nonstate actors and networks. The multiplicity of actors on the international scene could add strength or further fragment the international system and incapacitate international cooperation. The diversity in type of actor raises the likelihood of fragmentation occurring over the next two decades, particularly given the wide array of transnational challenges facing the international community.
The rising BRIC powers are unlikely to challenge the international system as did Germany and Japan in the 19th and 20th centuries, but because of their growing geopolitical and economic clout, they will have a high degree of freedom to customize their political and economic policies rather than fully adopting Western norms. They also are likely to want to preserve their policy freedom to maneuver, allowing others to carry the primary burden for dealing with such issues as terrorism, climate change, proliferation, and energy security. Greater Asian regionalism would have global implications, sparking or reinforcing a trend toward three trade and financial clusters that could become quasi-blocs: North America, Europe, and East Asia. Establishment of such quasi-blocs would have implications for the ability to achieve future global World Trade Organization (WTO) agreements. Regional clusters could compete in setting trans-regional product standards for information technology, biotechnology, nanotechnology, intellectual property rights, and other aspects of the “new economy.”
The U.S. will find itself as one of a number of important actors on the world stage, albeit still the most powerful one. Even in the military realm, where the U.S. will continue to possess considerable advantages, advances by others in science and technology, expanded adoption of irregular warfare tactics by both state and nonstate actors, proliferation of long-range precision weapons, and growing use of cyber warfare attacks increasingly will constrict U.S. freedom of action. A more constrained US role has implications for others and the likelihood of new agenda issues being tackled effectively.
When looking for winners and losers, it is clear that developing countries in Asia such as China, India and to some extent Vietnam are relative winners as they have opened up to trade and investment, became manufacturing or service hubs, and attracted foreign capital, resulting in rapid GDP growth, rising middle class, urbanization, and better infrastructure. Losers are countries with low-skilled worked in developed countries such as the U.S. Rust Belt, parts of Europe). This would also include countries that are not industrializing fast enough such as some Sub-Saharan African and Latin American nations. There is an overall move towards Asia from the West and this trend will likely continue going forward, creating more clear winners and losers in the global economy.