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Visualizing the Coming Shift in Global Economic Power (2006-2036p)

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Visualizing the Coming Shift in Global Economic Power (2006-2036p)

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Visualizing the Shift in Global Economic Power

As the post-pandemic recovery chugs along, the global economy is set to see major changes in the coming decades. Most significantly, China is forecast to pass the United States to become the largest economy globally.

The world’s economic center has long been drifting from Europe and North America over to Asia. This global shift was kickstarted by lowered trade barriers and greater economic freedom, which attracted foreign direct investment (FDI). Another major driving factor was the improvements in infrastructure and communications, and a general increase in economic complexity in the region.

Our visualization uses data from the 13th edition of World Economic League Table 2022, a forecast published by the Center for Economics and Business Research (CEBR).

When Will China Become the Largest Economic Power?

China is expected to surpass the U.S. by the year 2030. A faster than expected recovery in the U.S. in 2021, and China’s struggles under the “Zero-COVID” policies have delayed the country taking the top spot by about two years.

China has maintained its positive GDP growth due to the stability provided by domestic demand. This has proven crucial in sustaining the country’s economic growth. China’s fiscal and economic policy had focused on this prior to the pandemic over fears of growing Western trade restrictions.

India is Primed for the #3 Spot

India is expected to become the third largest country in terms of GDP with $10.8 trillion projected in 2031.

Looking back, India had a GDP of just $949 billion in 2006. Fast forward to today and India’s GDP has more than tripled, reaching $3.1 trillion in 2022. Over the next 15 years, it’s expected to triple yet again. What is behind this impressive growth?

For starters, the country’s economy had a lot more room to improve than other nations. Demographics are also working in the country’s favor. While the median age in many mature economies is shooting up, India has a youthful workforce. In fact, India’s median age is a full 20 years lower than Japan, which is currently the third largest economy.

Over the last 60 years, the service industry has boomed to around 55% of India’s GDP. Telecommunications, software, and IT generate most of the revenue in this sector. IT alone produces 10% of the country’s GDP. India’s large tech-savvy, English-speaking workforce has proved attractive for international companies like Intel, Google, Meta, Microsoft, IBM, and many others, while the domestic startup scene continues to boom.

The Indian government is also pursuing “production-linked incentives” (i.e. subsidies) for multinational companies looking to diversify their production away from China. If these incentives prove successful, more of the world’s solar panels and smartphones will be produced within India’s borders.

How Will the Global Economy Look in 2031?

By the year 2031, there will be major changes in the global economic power rankings.

As we said before: China will have become the world’s largest economy in terms of GDP and India will be the world’s third largest economy. Let’s also take a look at the top 10 economies by 2031.

RankCountryRegionProjected GDP in 2031
(in Trillions of USD)
1🇨🇳 ChinaAsia$37.6
2🇺🇸 United StatesNorth America$35.4
3🇮🇳 IndiaAsia$6.8
4🇯🇵 JapanAsia$6.4
5🇩🇪 GermanyEurope$6.3
6🇬🇧 United KingdomEurope$4.6
7🇫🇷 FranceEurope$4.2
8🇧🇷 BrazilSouth America$3.1
9🇨🇦 CanadaNorth America$3.0
10🇮🇹 ItalyEurope$3.0

Out of the top five economies, three are located in Asia: China, India, and Japan⁠—a clear demonstration of how economic power is shifting towards large population centers in Asia.

Europe will have four countries in the top 10: Germany, the United Kingdom, France, and Italy. From South America, only Brazil appears in the top 10.

Under these projections, Russia sits outside the top 10 in 2031. Of course, it remains to be seen how crushing sanctions and global isolation will affect the economic trajectory of the country.

Now, the big question. Is it inevitable that China takes the top spot in the global economy as predicted by this forecast? The truth is that nothing is guaranteed. Other projections have modeled reasonable alternative scenarios for China’s economy. A debt crisis, international isolation, or a shrinking population could keep China’s economy in second place for longer than expected.

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Beyond Big Names: The Case for Small- and Mid-Cap Stocks

Small- and mid-cap stocks have historically outperformed large caps. What are the opportunities and risks to consider?

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A line chart showing the historical return performance of small-, mid-, and large-cap stocks.

 

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The following content is sponsored by New York Life Investments
An infographic comparing low-, mid-, and large-cap stocks, including an area graph showing historical returns, a bubble chart showing how much $100 would be worth over 35 years, a horizontal bar graph showing annualized volatility, and a line graph showing relative forward price-to-earnings ratios, that together show that mid-cap stocks present a compelling investment opportunity.

Beyond Big Names: The Case for Small- and Mid-Cap Stocks

Over the last 35 years, small- and mid-cap stocks have outperformed large caps, making them an attractive choice for investors.

According to data from Yahoo Finance, from February 1989 to February 2024, large-cap stocks returned +1,664% versus +2,062% for small caps and +3,176% for mid caps.  

This graphic, sponsored by New York Life Investments, explores their return potential along with the risks to consider.

Higher Historical Returns

If you made a $100 investment in baskets of small-, mid-, and large-cap stocks in February 1989, what would each grouping be worth today?

Small CapsMid CapsLarge Caps
Starting value (February 1989)$100$100$100
Ending value (February 2024)$2,162$3,276$1,764

Source: Yahoo Finance (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.

Mid caps delivered the strongest performance since 1989, generating 86% more than large caps.

This superior historical track record is likely the result of the unique position mid-cap companies find themselves in. Mid-cap firms have generally successfully navigated early stage growth and are typically well-funded relative to small caps. And yet they are more dynamic and nimble than large-cap companies, allowing them to respond quicker to the market cycle.

Small caps also outperformed over this timeframe. They earned 23% more than large caps. 

Higher Volatility

However, higher historical returns of small- and mid-cap stocks came with increased risk. They both endured greater volatility than large caps. 

Small CapsMid CapsLarge Caps
Total Volatility18.9%17.4%14.8%

Source: Yahoo Finance (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.

Small-cap companies are typically earlier in their life cycle and tend to have thinner financial cushions to withstand periods of loss relative to large caps. As a result, they are usually the most volatile group followed by mid caps. Large-cap companies, as more mature and established players, exhibit the most stability in their stock prices.

Investing in small caps and mid caps requires a higher risk tolerance to withstand their price swings. For investors with longer time horizons who are capable of enduring higher risk, current market pricing strengthens the case for stocks of smaller companies.

Attractive Valuations

Large-cap stocks have historically high valuations, with their forward price-to-earnings ratio (P/E ratio) trading above their 10-year average, according to analysis conducted by FactSet.

Conversely, the forward P/E ratios of small- and mid-cap stocks seem to be presenting a compelling entry point. 

Small Caps/Large CapsMid Caps/Large Caps
Relative Forward P/E Ratios0.710.75
Discount29%25%

Source: Yardeni Research (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.

Looking at both groups’ relative forward P/E ratios (small-cap P/E ratio divided by large-cap P/E ratio, and mid-cap P/E ratio divided by large-cap P/E ratio), small and mid caps are trading at their steepest discounts versus large caps since the early 2000s.

Discovering Small- and Mid-Cap Stocks

Growth-oriented investors looking to add equity exposure could consider incorporating small and mid caps into their portfolios.

With superior historical returns and relatively attractive valuations, small- and mid-cap stocks present a compelling opportunity for investors capable of tolerating greater volatility.

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