China to Overtake U.S. by 2016 – IMF

According to the latest World Economic Outlook report from the International Monetary Fund (IMF), China will emerge as the top economy based on real GDP five years from now. They estimated that the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016, while the U.S. economy will grow from $15.2 trillion to $18.8 trillion in the same period. Based on those forecasts, China would be churning out more than 18% of global economic output and the U.S. would contribute just 17.7%.

As I mentioned, these GDP estimates were calculated in real terms, which accounted for inflation and exchange rate adjustments. Without accounting for these factors, the U.S. will still hold the top spot five by 2016. The IMF predicted that US nominal GDP would land at $18.8 trillion while China’s nominal GDP would be far behind at $11.2 trillion five years from now.

In other words, China is slated to overtake the U.S. based on real GDP, but the U.S. is likely to hold on to the top spot in terms of nominal GDP. Which measure paints a more realistic picture then?

Race cars

Since the calculation of the real GDP takes inflation and exchange rates into consideration, it seems to be a more reasonable standard of comparison. However, the IMF pointed out that the nominal GDP is still the most appropriate measure for comparing the relative sizes of economies because it isn’t influenced by non-traded services. Apparently, these services are just relevant in the domestic arena and it doesn’t really matter in the global scale.

I know some of y’all have your eyebrows raised, so let’s take a look at what other economic gurus are saying, shall we?

According to Conference Board, an organization whose number crunching skillz are renowned worldwide, China’s race to the top may be sooner than what everyone thinks! Late last year, it calculated that the country’s real GDP will amount to $15.2 trillion in 2012, surpassing its $14.8 trillion projection for the U.S.

A few factors also point to the U.S. economy’s possible descent from the pedestal.

First on the roster is a weak government. Market junkies are worried that the political debacle in Washington surrounding the budget will have huge repercussions on the economy. Heck! It almost led to a government shutdown a few weeks ago!

Naysayers also think that the Fed‘s lax monetary policy will spell more trouble for the economy. Why? Higher interest rates in China are already attracting more income flows to the country. In the long run, the Fed’s dovish stance may lead to the dollar to losing its reserve currency status. Yikes!

But of course, as we economic nerds would say, there’s no such thing as a free lunch. In China’s campaign to become the leader of the world economy, it runs the risk of overheating. At its fast pace of expansion, it runs the risk of producing asset price bubbles. Also, rising prices in the country make basic goods less affordable to the majority of the Chinese population.

Five years is a long time though, wouldn’t you say? One or two black swan events could happen and change the course of the game. Who knows, the U.S. may still be seated on top of the pedestal when that time comes. However, it’s interesting to think about how the world economy would be like when China is number one.

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