The US has surpassed China's population

Growth region Asia: The economy in China continues to grow rapidly

April 23, 2021

In Asia, economic growth continues to be above average, and a slowdown in economic momentum is by no means certain. Even our current forecast could be exceeded. Which countries have the best prospects for growth and what investors should keep an eye on in these times.

The International Monetary Fund recently revised its global growth forecast for this year upwards from 5.5 to 6.0 percent. The upswing is expected to continue next year with somewhat less momentum - growth of 4.4 percent is expected. Compared to the average global economic growth of 3.3 percent between 2009 and 2019, this is still an above-average value.

Reasons for the adjusted growth forecast of the International Monetary Fund

The decisive factor for the forecast adjustment is above all the expansive fiscal policy in the industrialized countries, above all that in the USA. But the high rate of vaccination and the associated expectation that corona-related economic lockdowns could soon be a thing of the past have prompted the IMF to revise its growth forecast for industrialized countries from 4.3 to 5.1 percent this year and in 2022 to increase from 3.1 to 3.6 percent.

In contrast to the industrialized countries, the expectations for growth in the emerging countries have only been adjusted slightly: from 6.3 to 6.7 percent this year, while the forecast for 2022 remains unchanged at 5.0 percent. However, there are clear regional differences. By far the strongest growth is recorded in Asia (2021: 8.6 percent, 2022: 6.0 percent), while Latin America, Eastern Europe, the Middle East and Africa are expected to show similar growth rates of around four percent in the next two years.

Two countries in particular have a major impact on the global economy: the USA and China

The USA stands for the industrialized countries and China for the emerging countries - although one can argue about whether China can still be described as an emerging country in view of the economic size it has already achieved. However, the per capita income in China at around 10,000 US dollars is still much lower than in Germany (46,000 US dollars) despite the strong increase in recent years (2000: 950 US dollars, 2010: 4,500 US dollars). Dollars) or in the United States ($ 63,000).

China will be the main engine for the global economy this year

The economic data were extremely strong in the first quarter, even if the growth rate of 18 percent compared to the same quarter of the previous year is optically exaggerated due to the economic slump at the beginning of 2020. In connection with the publication of the GDP figures, it was stated that they were “disappointing”, as the growth compared to the previous quarter was lower than expected. However, this is mainly due to the fact that there are various data sets in China with which the government is able to paint a picture of the situation that suits it.

It is possible that Beijing does not think it is opportune at the moment to show how strong the economy really is, after all, they see themselves as the trigger for the biggest economic downturn in the past hundred years in many international pillories.

The fact that the Chinese economy is able to shake off the corona slump in the shortest possible time while most other countries are still struggling with the consequences of the pandemic would probably not go down well.

In any case, the data we have evaluated for Chinese economic performance show that growth in the first quarter of 2021 has improved again compared to the previous quarters, which were already positive. Even assuming that quarterly growth will weaken for the rest of the year and that growth rates will only be achieved as before the corona pandemic, thanks to the good start to the year, our growth forecast for the Chinese gross domestic product increases from ten to eleven percent - which we do remain significantly more optimistic than the IMF and most other economists.

But even our current forecast could be exceeded

Because a weakening of the economic momentum is by no means certain. Until now it was mainly the Chinese industry that was responsible for the strong growth of the past few months, but it now looks as if service providers and consumers are also regaining their old strength. The economic catching-up process does not have to run out of steam anytime soon.

Investors should, however, keep an eye on the supply of liquidity to the economy: if there were clearer signs of braking, this would be a signal that growth will weaken in the medium term.

With a growth rate of eleven percent that we forecast, China overshadows almost all other Asian economies. The IMF is only expecting even stronger economic momentum for India this year. Base effects also play a key role in the growth rate of 12.5 percent, after all, real Indian gross domestic product fell by eight percent last year.

Still, we are skeptical whether India can achieve such a growth rate this year. This is because India cannot get the new corona infection under control. Most recently, a sad world record was even set with 300,000 new daily cases. In contrast, the number of new corona infections in the other Asian countries is very low, although the number of infections has recently increased again.

However, since most Asians are very disciplined and adhere to administrative rules more strongly than others, the risk of economic restrictions being tightened again in the future in order to curb the spread of the virus is low - unlike, for example, in Brazil or Turkey, which, like India, are also involved have to struggle with rapidly increasing numbers of new infections.

The economic dynamism is mainly due to the population development

The strong economic growth not only in China, but in almost the entire Asian region, of course, has only a small part to do with dealing with the corona pandemic. In the long term, the economic dynamism is mainly due to population growth. Around 60 percent of the world's population currently lives in Asia, almost 20 percent of them in China and India alone.

Since, in addition to productivity, the available workforce is decisive for the growth potential of an economy, it becomes clear what influence the population development has on the economy and its future prospects. According to forecasts by the UN, the population of Asia will increase from the current 4.6 billion to 5.3 billion in 2050, before falling back to 4.7 billion by 2100. This means that Asia will remain a dynamically growing region for the next 30 years.

We believe that China will continue to achieve high growth rates in the next ten years, during which time it will have overtaken the USA, which is still the world's largest economic power. But then, at the latest, other countries will come into focus due to their population growth: in addition to India, above all the Philippines, Cambodia, Malaysia, Indonesia and Vietnam and, depending on political developments, also Pakistan, Iran and perhaps Bangladesh.


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Author: Carsten Klude

After completing his training as a banker at Deutsche Bank, Carsten Klude studied economics with a focus on econometrics in Kiel. In 1996 he came to M.M.Warburg & CO, for whom he initially analyzed the European capital markets and was later entrusted with the management of macro research. Since 2009, Mr. Klude has been a member of the investment council of M.M.Warburg & CO and has been responsible for the bank's asset management since summer 2013. In addition, Mr. Klude has been a member of the Economic and Monetary Policy Committee of the Association of German Banks, which he chaired from 2015 to 2018, since 2010.

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