May 12, 2015

BNY Mellon assesses the impact of Japan, America, China and India fulfilling their economic potential simultaneously

Optimistic scenario would add over $10 trillion to the four economies’ combined GDP by 2020


HONG KONG, MAY 12, 2015 – In a new white paper, BNY Mellon, a global leader in investment management and investment services, explores what might happen if four of the world’s largest economies all stopped floundering and started flourishing at the same time.  Although the world seems resigned to an era of subdued growth1, four giant economies – Japan, America, China and India – are in the midst of recovery, reform, or both.  (see bnymellon.com/G4 for the white paper)

Under Shinzo Abe, Japan now has its most stable government in almost a decade and a central bank that has twice surprised the markets with its determination to defeat deflation. In America unemployment has dropped surprisingly quickly as firms have added jobs at the fastest pace since the dot-com boom2. China’s President, Xi Jinping, has consolidated power faster than his predecessor with his anti-corruption campaign and staked his personal authority on economic reform3. And in India’s 2014 election, Narendra Modi won the first single-party majority in thirty years, promising to restore the country’s economic momentum.

“This is an unusual confluence of events,” says BNY Mellon investment strategist Simon Cox. “The United States is enjoying a durable recovery just as all three of Asia’s big powers boast secure, confident governments committed, at least in word, to economic reform. The region’s stars rarely fall into alignment in this way.”

This combination raises the tantalizing possibility that all four of these giant economies might fulfill their economic potential at roughly the same time. This is the scenario BNY Mellon is exploring in a series of white papers this year. The scenario assumes that Japan’s growth revives to 2 percent a year on average for the remainder of this decade, America’s averages about 3 percent, China’s 7 percent and India’s 8 percent. “This scenario is optimistic, without being utopian,” Cox says. “It’s contrarian, without being crazy.”   

If this scenario were to materialize, the consequences would be profound. China, America, India and Japan account for almost 45 percent of global GDP4. They consume a similar proportion of global energy and contributed well over half of last year’s global economic growth. BNY Mellon calls them the G4.

BNY Mellon’s optimistic G4 scenario would add over $10 trillion to the four economies’ combined GDP by 2020. According to an independent modelling exercise by the Economist Intelligence Unit, it would help add $8 trillion to the rest of the world’s GDP outside these four. This would be enough to restore a $100 oil price within three years and lift global food prices by over 40 percent from their level in March 20155. It would help the Nikkei 225 surpass 24,400, the Sensex exceed 45,000 and the S&P 500 reach 3,000 by the end of the decade.

According to Cox, recent economic weakness has left the G4 economies with substantial “slack”. Their GDP has fallen short of their potential, leaving them substantial room to grow without generating unwelcome inflationary pressure. The gap between America’s actual GDP and its potential GDP adds up to a cumulative $5.3 trillion over the past seven years, a waste of resources that is equivalent to shutting down the entire economy for three-and-a-half months6.  

For BNY Mellon’s G4 scenario to come true, the four economies would all have to perform better than the IMF and many other forecasters now expect. But in most cases, the G4 scenario is in keeping with what the IMF and others foresaw a few years ago.  Forecasters have lowered their sights in the past few years in the belief that recent economic setbacks reflect a new trend. Cox believes this is “a little defeatist”. He prefers to view these four economies with undiminished expectations.
 
“Before the financial crisis, many people thought the rosy status quo would persist indefinitely. Now they’re assuming that the future must be as grey as the present. By taking on the glum consensus and exploring what could happen if the G4 all do well, we want to create a robust discussion that helps investors think through all of the potential scenarios for future growth,” says BNY Mellon Investment Management APAC CEO Alan Harden.   

To foster that discussion, BNY Mellon will host a series of conferences across the Asia-Pacific region starting in Japan. These events will gather policy makers, economists and industry leaders to exchange views on the G4’s growth prospects.  Steve Lackey, BNY Mellon APAC Chairman, notes, “The white papers are intended to be living documents that will reflect the ideas exchanged over the course of the year as we discuss the current challenges and future outlook for the four leading economies in the world.”

BNY Mellon Investment Management is one of the world's leading investment management organizations and one of the top U.S. wealth managers, with US$1.7 trillion in assets under management as at March 31, 2015. It encompasses BNY Mellon's affiliated investment management firms, wealth management services and global distribution companies. More information can be found at www.bnymellonam.com.

BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 35 countries and more than 100 markets. As of March 31, 2015, BNY Mellon had $28.5 trillion in assets under custody and/or administration, and $1.7 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com, or follow us on Twitter @BNYMellon.

 

1 Christine Lagarde of the IMF has warned that the world economy risks settling into a “new mediocre”. Larry Summers of Harvard worries that lackluster demand in the mature economies will persist, even as rapid growth in China and India does not.
2 According to the Bureau of Labor Statistics, America’s non-farm payrolls increased by 3.227 million in the 12 months ending February 2015, the biggest 12-month increase since May 2000.
3 http://www.hoover.org/sites/default/files/uploads/documents/CLM43BN.pdf
4 India’s GDP is the 9th biggest in the world at market exchange rates, according to our calculations. But it is forecast to make the third biggest contribution to global growth this year (according to the IMF) and it is already the world’s third biggest economy measured at PPP, according to the same source.
5 As measured by the FAO Food Price Index.
6 BNY Mellon calculations, based on Congressional Budget Office estimates of potential GDP and actual GDP figures from the Bureau of Economic Analysis.

This press release is qualified for issuance in Hong Kong and is for information purposes only. It does not constitute an offer or solicitation of securities or investment services or an endorsement thereof in any jurisdiction or in any circumstance in which such offer or solicitation is unlawful or not authorised.  Any views and opinions contained in this document are those of the authors as at the date of issue; are subject to change and should not be taken as investment advice. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally. The Bank of New York Mellon, a banking corporation organized and existing pursuant to the laws of the State of New York (member FDIC) and a wholly owned subsidiary of The Bank of New York Mellon Corporation, has its principle place of business in Hong Kong at Level 24, Three Pacific Place, 1 Queen’s Road East and is subject to regulation by the Hong Kong Monetary Authority and the Securities & Futures Commission of Hong Kong. Principle place of business of BNY Mellon Investment Management Hong Kong Limited: Level 25, Three Pacific Place, 1 Queen’s Road East, Hong Kong.  Authorised and regulated by the Securities and Futures Commission.  A BNY Mellon CompanySM