The International Monetary Fund sent a shock through the financial markets today when it said that China would surpass the U.S. as the world's largest economy by 2016. But really, any investor that's been paying attention the last few years since the financial crisis hit the economy shouldn't consider this that big of a surprise. In addition to the U.S. government's inability to control spending and stalled financial sector, China's economy has been red hot for years now.
Though news of a country actually surpassing the U.S. is still a shock to most, especially one that was only one-third the size of the U.S. economy only a decade ago. But according to the IMF in its most recent forecast, China's economy will outgrow the U.S.'s gross domestic product as measured by purchasing power parity. In 2016, the U.S. will have a GDP of $18.5 trillion, equating to roughly 17.7 percent of global GDP. The U.S. currently has a GDP of $15 trillion, and makes up 20 percent of the world's economy.
Hard to top, right? But apparently China, who's current GDP weighs in at 11.2 trillion (14 percent) will grow to an astounding $19 trillion in five years and make up 18 percent of the world's GDP.
Criticism of IMF Forecast
But the IMF figures are far from consensus and definitely not a foregone conclusion. Experts point to the GDP metric the organization uses and the lack of accounting for China's growing pains or economic disruptions. As hot as China's economy has been, maintaining a 9.7 annual GDP growth rate consistently is still a tall order. In addition, China is facing an infrastructure and real estate bubble that's been inflating the last few years.
One of the problems for China may be that it has been growing too fast for its own good. Inflation is becoming a legitimate concern, and the cultural and political shifts that come from transitioning into a super power can also cause a strain as well.
China on Top
To its credit, China is well-positioned to capitalize on current economic trends and the U.S.'s financial vulnerabilities going forward. In addition to a larger economy, China may even surpass the military might of Uncle Sam, a notion some probably deemed impossible. At this rate, with China continuing to devalue its currency against the U.S. despite the weakened dollar and fund its addiction to debt, its not hard to imagine the two trends coming to a head. China is ascending while the U.S. seems to be descending at an accelerated pace.
U.S. Stays Dominant
Five years is a relatively short period in economic time, and if the U.S. lawmakers cannot get their act together to turn the tide, Americans will be facing a new world in which China may, in fact, be the new global leader in economic and political influence. However, the U.S. is still currently considered the financial capital of the world and leverages innovative industries that could spark a new boom market. When, where and if that happens, however, is impossible to predict. On the bright side, even if the IMF is correct in five years, the GDP per capita for both countries would still suggest that the U.S. is still ahead of China. In that sense, the U.S. economy is still on top.