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Although the world economy has staged a better-than-expected recovery in 2010 following the economic downturn, both the recovery and outlook highlight major global economic divisions, while rebalancing of world demand will remain the key challenge. Developed economies will continue to face sluggish growth while emerging markets lead the global recovery. This two-tier world growth will have implications for consumer spending prospects and the business environment overall.
The world economy is rebalancing as the shift in economic power towards emerging markets continues. By 2020, China will be the world’s largest economy in PPP terms and India the third largest while the USA drops to second place and Japan to fourth. (Purchasing power parity: a method of measuring the relative purchasing power of different countries’ currencies over the same types of goods and services):
Global divisions in the world economy highlight the need for rebalancing of demand but this will be challenging. The global imbalance between the world’s major spenders and exporters (exemplified by high current account deficits/surpluses) is not sustainable. Lower demand from advanced economies will strengthen the need for export-dependent emerging markets in particular to rebalance growth towards domestic demand:
|US$ billions / % of GDP|
Major deficit countries such as the USA will aim to rebalance growth towards increasing exports (private final consumption expenditure accounted for 71.4% of US GDP in 2009). Surplus countries such as China will need to move away from export dependency and increase domestic demand – private final consumption in China only accounted for 34.6% of GDP in 2009.
Rebalancing of world demand will help to insulate economies against future economic shocks but will be challenging, which will put pressure on consumption patterns in the short-term. However, the successful growth of domestic demand in major emerging markets will unleash significant opportunities for consumer goods and services in the longer-term.