By 2040, Asia’s economies to contribute to 50% of global GDP: McKinsey Global Institute

India's GDP growth looks bleak

Asia may well become the driver of 40% of the world consumption and contribute to 50% of the global GDP by 2040. McKinsey Global Institute (MGI) in a discussion paper has projected the bright future for Asia, released on Monday.

The paper claimed Asia as the emerging contributor to the global trade flow as well as in terms of capital, talent and innovation. In its report decades-ahead, it said “one of the most dramatic developments of the past 30 years” Asia’s economies would go from participating in these flows to determining their shape and direction. It added that in many sectors from the internet to trade and luxury goods, where they already were. It is no longer question how quickly Asia will rise, it is how Asia will lead, it said.

“In 2000, Asia accounted for just under one-third of global GDP (in PPP terms), and it is on track to top 50 per cent by 2040. By that point, it is expected to account for 40 per cent of the world’s total consumption,” the report highlighted.

McKinsey & Company, in partnership with the MGI, launched Future of Asia – new research that examines, not how quickly Asia will rise, but how Asia will lead. The MGI research examined 71 developing economies and singled out 18 of them for consistently posting robust economic GDP growth. All seven long term outperformers and five out of 11 recent outperformers are located in Asia.

“If you want to understand the global economy and its future, you need to understand Asia,” said Oliver Tonby, Chairman of McKinsey in Asia. According to the research, the 21st-century will be characterized by a pivot toward Asia, and business and market leaders will need an accurate picture of what a future Asia will look like as they set long-term strategies.

McKinsey’s research highlights that the region is on track to top 50% of global GDP by 2040 and drive 40% of the world’s consumption. Furthermore, as consumption rises, more of what gets made in Asia is being sold locally instead of being exported to the West.

Today, 52% of Asian trade is intra-regional. “While the previous era of globalization was marked by Western companies building supply chains that stretched halfway around the world as they sought out the lowest possible labour costs, today only 18% of goods trade involves exports from low-wage countries to high-wage countries,” said Jonathan Woetzel, a Senior Partner at McKinsey and Director of MGI.

According to the report, in 2017, the share of intra-regional goods trade stood at 40.7% in the North American Free Trade Agreement (NAFTA) region, 63% in the European Union, 21.7% in the Latin America and Caribbean (LAC) region, 18.8% in Sub-Saharan Africa and 15.9% in the Middle East and North Africa (MENA) region.

The report highlighted that over the decade from 2007 to 2017, China almost tripled its production of labour-intensive goods from $3.1 trillion to $8.8 trillion. However, at the same time, the share of gross output of Chinese exports dramatically decreased from 15.5% to 8.3%.

India, it added, has similarly been exporting a smaller share of its output over time. “This implies that more goods are being consumed domestically rather than exported,” said the report. “Furthermore, as the region’s emerging economies develop new industrial capabilities and begin making more sophisticated products, they are becoming less reliant on foreign imports of both intermediate inputs and final goods.”

The report also said that Asia was no longer the world’s cheap factory. While noting that labour-intensive manufacturing for export was a major engine of China’s economic rise and that it had historically been the clear path to economic development for poor countries, the report said that opportunities to compete on the basis of low-cost labour were narrowing as wages were rising across the region and as automation was being adopted more widely.

However, it added that the window was not closed yet for some countries in the region. As wages have risen in China, countries like Vietnam, India and Bangladesh have managed to grow their exports of labour-intensive manufactured goods by annual rates of 15%, 8% and 7% respectively, said the report. The MGI discussion paper also said that the Asian services trade was booming. While the trade intensity of goods has declined, service flows have become the real connective tissue of the global economy and Asia’s services trade is growing 1.7 times faster than the rest of the world’s, it added.

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