Catching the eagle

By S.R. and D.H.

We invite you to predict when China’s economy will overtake America’s

LESS than two centuries ago, China was far and away the world’s biggest economy. It accounted for more than 30% of global GDP in 1820, according to estimates by Angus Maddison, a late economist. Its share dwindled in the 19th century as the industrial revolution propelled Europe and America rose up. The 20th was even less kind to China, riven by invasion, civil war and a lurch to communism. Thanks to a furious 35 years of market reforms, it is only a matter of time before China reclaims its spot as the biggest economy of all. Our essay this week—"What China wants"—argues that China now also craves the respect it once enjoyed, but does not know how to achieve it. China’s path to being the world’s biggest economy is, by contrast, much clearer.

In December 2010 we introduced an interactive chart that allows you to make your own prediction of when China’s economy will overtake America’s. There are a variety of ways to compare economies. Our chart looks at their GDP in current dollars at market exchange rates. The timing of China’s ascent thus depends on five things: its own growth, America’s growth, the evolution of prices in each country, and the exchange rate between them. If, for example, China’s prices rise faster than America’s and its currency, the yuan, does not fall, then China’s economy will be worth more, relative to America’s, and it will overtake sooner.

When we first introduced the chart in 2010, we included a set of default assumptions for the following decade. We assumed that growth would average 7.75% in China over the subsequent ten years and 2.5% in America. We further assumed that inflation would average 4% in China and 1.5% in America. The yuan, we guessed, would strengthen by 3% a year on average. Based on this combination of assumptions, China would overtake America as early as 2019*. We are now four years into that forecast. How have we done? In the spirit of transparency that we urge of other would-be economic fortune tellers, we admit to being a little off, though not, it must be said, by much. It now looks like America’s eclipse will come two years later than initially anticipated^†.

American growth has been a little lower than expected but inflation a bit higher, making that side of the projection quite accurate. The margin of error was bound to be larger with China, given the speed at which it has been developing. We were nearly spot-on with our growth forecast, though are now revising down our expectation for the remainder of the decade to a 7% average annual pace as the economy matures. The bigger surprise has been the halt of yuan appreciation this year—a policy dictated by the government, not the market—and the sharp drop in inflation as producer prices have fallen. A yawing trade surplus still points to a stronger yuan, so we maintain our forecast for sustained appreciation, though expect the upward march to come in fits and starts. As for inflation, excess industrial capacity remains a drag but is gradually being worked out of the system; we nudge our forecast down to 3%.

We have plugged our expectations into the chart above (updated August 22nd 2014) as the default assumptions. Totting it all up, we now see 2021 as the year of China’s re-emergence as world’s biggest economy. But we would never claim to be infallible, and invite you to fiddle with the five moving parts in the model to generate your own forecast. This much is certain: rounded to the nearest century, it will take China’s economy exactly two to return to the top of the world.

*When we updated the chart in December 2011, the same assumptions suggested that China would overtake a year earlier, in 2018. That projection attracted a lot of attention.

^†We published our first interactive chart in December 2010 before that year's figures for GDP and prices were available. We therefore used the IMF's estimates for 2010 instead.