Asia on track to top 50% of world GDP by 2040, says McKinsey report

Continent to drive 40% of global consumption; As Chinese wages have risen, nations like Vietnam, India and Bangladesh have grown yearly exports of labour-intensive goods by 15%, 8% and 7% respectively

Asia is on track to top 50 per cent of global GDP by 2040 and drive 40 per cent of the world's consumption, says a McKinsey Global Institute (MGI) discussion paper, titled 'Asia's Future is Now', released on Monday.   

While describing emerging Asia's soaring consumption and its integration into global flows of trade, capital, talent, and innovation as "one of the most dramatic developments of the past 30 years", the report said that in the decades ahead, Asia's economies would go from participating in these flows to determining their shape and direction. It added that in many areas --from the internet to trade and luxury goods -- they already were. "The question is no longer how quickly Asia will rise; it is how Asia will lead," it said. 

"In 2000, Asia accounted for just under one-third of global GDP (in PPP terms), and it is on track to top 50 per cent by 2040. By that point, it is expected to account for 40 per cent of the world's total consumption," the report highlighted. 

The MGI discussion paper, which provides an overview of Asia's role in the four areas of trade flows and networks, corporations in Asia, technology and the Asian consumer, is part of the 'Future of Asia' initiative launched on Monday by McKinsey & Company, in partnership with the McKinsey Global Institute. The initiative is a multi-channel and multi-year research effort "that examines, not how quickly Asia will rise, but how Asia will lead".

With rising consumption, more of what gets made in Asia is being sold locally instead of being exported to Western countries, said the report. At present, 52 per cent of Asian trade is intra-regional, it added. 

According to the report, in 2017, the share of intra-regional goods trade stood at 40.7 per cent in the North American Free Trade Agreement (NAFTA) region, 63 per cent in the European Union, 21.7 per cent in the Latin America and Caribbean (LAC) region, 18.8 per cent in Sub-Saharan Africa and 15.9 per cent in the Middle East and North Africa (MENA) region. 

Jonathan Woetzel, a senior partner at McKinsey and director of MGI, said intra-regional trade is increasingly important to Asia with supply chains becoming shorter and more localised. "While the previous era of globalisation was marked by Western companies building supply chains that stretched halfway around the world as they sought out the lowest possible labour costs, today only 18 per cent of goods trade involves exports from low-wage countries to high-wage countries," added Woetzel.  

The report highlighted that over the decade from 2007 to 2017, China almost tripled its production of labour-intensive goods from $3.1 trillion to $8.8 trillion. However, at the same time, the share of gross output of Chinese exports dramatically decreased from 15.5 per cent to 8.3 per cent. India, it added, has similarly been exporting a smaller share of its output over time. "This implies that more goods are being consumed domestically rather than exported," said the report. "Furthermore, as the region's emerging economies develop new industrial capabilities and begin making more sophisticated products, they are becoming less reliant on foreign imports of both intermediate inputs and final goods."

However, the report also said that Asia was no longer the world's "cheap factory". While noting that labour-intensive manufacturing for export was a major engine of China's economic rise and that it had historically been the clear path to economic development for poor countries, the report said that opportunities to compete on the basis of low-cost labour were narrowing as wages were rising across the region and as automation was being adopted more widely. 

However, it added that the window was not closed yet for some countries in the region. As wages have risen in China, countries like Vietnam, India and Bangladesh have managed to grow their exports of labour-intensive manufactured goods by annual rates of 15 per cent, eight per cent and seven per cent, respectively, said the report. 

The MGI discussion paper also said that the Asian services trade was booming. While the trade intensity of goods has declined, service flows have become the real connective tissue of the global economy -- and Asia's services trade is growing 1.7 times faster than the rest of the world's, it added.  

Stating that Asian corporates were on the rise, the report said that over 40 per cent of the world's 5,000 largest companies were Asian. It added that the 2018 Fortune Global 500 ranking confirmed that 210 of the world's 500 biggest companies by revenue were Asian.  

It also found that Asia's share of top-performing firms had grown from 19 per cent to 30 per cent in the past two decades. The report said that most of these companies were from China, India, Japan, and Korea, and the most dominant sectors within this group were computers and electronics, automotive, and banking.   

The report argued that Asia was shaping the future of digital innovation. At present, Asia already accounts for half (2.2 billion) of the world's internet users, with China and India alone accounting for one-third, it said.  

In particular, the report said, China had become a force to be reckoned with in the digital domain, both at home and around the world. As a major worldwide investor in digital technologies and one of the world's leading adopters of new technologies, China was already shaping the global digital landscape and supporting and inspiring entrepreneurship far beyond its own borders, it added.   

The report also said that Asia has ample venture capital to support technology innovation and entrepreneurship. It added that China has provided 20 per cent of the world's venture capital between 2014-2016, with India not far behind, and that China now ranked second only to the United States in terms of start-up investment. 

Further, it highlighted that as of April 2019, Asia was home to more than one-third of the world's unicorns -- start-ups valued at more than $1 billion. According to the report, ninety-one of these companies were in China, followed by India with 13, South Korea with six and Indonesia with four. 

The report also said that Asia's consumers were a force in the global economy. It said that by 2020, Asia's middle class would be around three-billion-strong and the region could be home to half of the world's middle class. It added that Southeast Asia, alone, which had 80 million households in the consuming class only a few years ago, was now expected to double to 163 million households by 2030. 

It said that these newly prosperous consumers would have income levels that would allow them to make significant discretionary purchases. The report projected that over the next decade, the region might fuel half of the consumption growth worldwide.