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Home > Opinion > Philip Coggan

Preparing for the shift to the East

Western investors must pay attention to Asia’s increasing share of a range of global activities

By Philip Coggan | Published Mar 12, 2012 | Investments | comments

When you are investing for the long term, you need to think about long-term trends.

And the likeliest long-term trend is the continued rise of Asia.

In 1970, developing Asia (everything but Japan) produced just 9 per cent of world GDP. By 1990, its share had risen to 14 per cent. Now it is 28 per cent. By 2030, its share is expected to be 40 per cent and by 2050, almost 50 per cent, according to forecasts from the Economist Intelligence Unit.

Currently North America (the US and Canada) has 21.5 per cent of world GDP and western Europe 18.7 per cent. By 2050, their respective shares will be 12.3 per cent and 8.9 per cent. In other words, their contribution will be less than half that of Asia.

Just think about that in terms of world markets. American oil consumption is 19m barrels a day. China consumes just 9m barrels, even with four times as many people. If China’s consumption per capita rose to just half US levels, its total consumption would be 38m barrels a day. The extra 29m barrels a day China would consume is the equivalent of a third of current oil production. And that is before we think about the extra oil that will be needed by the rest of the world. There will be 9bn people on the planet, compared with just 7bn today.

Unless there is some massive technological breakthrough, it is hard to imagine oil prices ever going back to the $20-$30 range that, 10 years ago, would have seemed to be the normal level. The new oil that we find is much more expensive to develop.

Unless there is some massive technological breakthrough, it is hard to imagine oil prices ever going back to the $20-$30 range that, 10 years ago, would have seemed to be the normal level.

Philip Coggan

The economic power of China will also be matched by political power. Take defence. The US currently spends around $700bn (£445bn) or 4 per cent of GDP on its military. China spends $100bn or 2 per cent of its GDP. Roll those numbers forward and assume, thanks to budget cuts, that the US is only spending 3 per cent of GDP on defence. On that basis, Chinese defence spending will overtake that of the US by 2035. By 2050, China will be spending half as much again. Imagine a clash over Taiwanese independence in the light of those figures.

All these forecasts are extrapolations, of course, and extrapolations can exaggerate. We once thought Japan would overtake America before its demographics kicked in. But the trend is clear: power is shifting East.

Wealth will surely flow in the same direction. Now British investors know that emerging markets can be volatile and that GDP growth does not automatically translate into stockmarket gains.

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