Driven by its expertise in the service sector, India is on track to achieve strong growth over the next decade and overtake Japan in gross domestic product by 2028 to become the third largest economy after China and the U.S., a Bank of America Merrill Lynch (BAML) report said.
The BAML report, “India 2028: The last BRICK in the Wall,” noted that the key drivers for India’s economic potential are falling dependency ratios, financial maturity and increasing incomes and affordability.
India has already moved ahead of Brazil and Russia to become the second largest BRIC economy after China and is on track to jump over France and the U.K. to land as the world’s fifth largest economy after Germany by 2019, the report noted.
With a projected 7 percent real GDP growth, the report said the dependency ratio–defined as unproductive population in the under 14 and over 65 age group–is slated to fall to 46.2% in 2028 from 52.2% currently and from 71.7% in 1990. This should maintain a savings rate of at least 32 percent by 2028 compared to an average 31.4% from 2000 to 2017, and 20.5% in the prior two decades.
A rising savings rate should push the investment rate up to 35 percent of GDP in 2028 from 32.4% percent in 2017. That should lift growth to 10 percent from 7.1% last year, according to the report.
[Read more about the BRIC economies: Did BRICs Hit the Bricks? Why the Emerging Economies Aren’t Seeing the Same Growth]
On a global scale, the November World Forecast Flash from Global Insight by IHS Markit chief economist Nariman Behravesh and executive director Sara Johnson that “barring a shock, the global economic expansion has staying power.”
The best global growth rate in seven years—3.2% in 2017—is based on firm foundations–macroeconomic policies remain growth-supportive, notwithstanding a gradual “normalization” of monetary policy, they said.
This expansion could continue for at least a couple more years, even though there is no shortage of low-probability and high-impact risks, like North Korea. The biggest threats to world growth are policy shocks. In the past, central banks have tightened policies too much either prematurely or too late. With inflation quiescent, the risk of tighter monetary policy killing off this expansion remains low.
The U.S. third-quarter real GDP growth was reported at a solid 3 percent, despite disruptions stemming from hurricanes Harvey and Irma. Were it not for the hurricanes, third-quarter real GDP growth could have registered 3.5%, indicating “the underlying momentum in the economy is strong,” the report noted.
“We forecast real GDP growth of 2.2% this year and 2.5% in 2018,” Behravesh and Johnson said. “This lowers the unemployment rate to below 4 percent in late 2018.”
In Europe, they expect above-trend and lower-dispersion growth. Year-on-year real GDP growth picked up to 2.5% in the third quarter, from 2.3% in the second quarter. The third quarter benefited from robust expansions in Germany, Spain and Austria, as well as solid performances in France and Italy.
“The near-term outlook is encouraging,” the IHS experts said. “Thanks to better labor market conditions and low inflation, consumer spending will remain a reliable engine of growth. Firms are lifting their investment intentions, encouraged by better access to credit, a more upbeat assessment of the economic situation and a competitive currency. While political and economic challenges remain, our forecast of real GDP growth has been raised to 2.4% this year and 2.1% in 2018.”
Regarding China, Behravesh and Sara Johnson said, “Now comes the hard part. With the fanfare of the 19th Chinese Communist Party Congress over, the country’s structural problems need to be addressed. The only question is how. The pronouncements by President Xi and other Chinese policymakers suggest a continuation of the top-down, state-led strategy of the past. This strategy led to the explosion of debt and excess industrial capacity during the past decade.”
They said as government stimulus applied in the run-up to the Party Congress is removed, real GDP growth is expected to slow from 6.8% this year to 6.5% in 2018 and 6.2% in 2019. Early evidence shows growth in China’s economic activities softened in October, with decelerations in industrial output, fixed-asset investment, retail sales and residential real estate starts.
Looking at other large emerging markets, “The two-year slump is over, but there is no boom in sight,” the report surmised. “The recent upturn in global economic growth and commodity prices has helped the emerging world in 2017. Moreover, progress in bringing inflation below targets has allowed some central banks to lower interest rates.”
Brazil and Russia are beginning to recover from 2015-16 recessions, but average emerging-market growth will only be around 5 percent during the next three years, less than the 7 percent to 8 percent rates of the mid-2000s in the heyday of the BRIC era.
The bottom line from IHS Markit is growth in 2017 will turn out to be much better than in 2016, and growth in 2018 and 2019 will likely remain in the 3 percent range, without taking into account “unknown unknowns.”