Economic and Financial Market Update: On Top Of The World


  • The US has been the largest economy in the world for almost a century;
  • But China (and India) are catching fast;
  • Australia’s growth performance has been reasonable over the past decade(s);
  • An improved productivity performance will be necessary to increase living standards.


‘Cause I’m on top of the world, ‘ey

I’m on top of the world'

- Imagine Dragons


League tables

League tables always grab attention. Whether it is gold medals, football standings, school rankings or restaurant reviews, people want to know who is on top. There are many measures to gauge the standing of an economy. Two that often grab the eye is the size and growth rate of an economy. 

Size matters

Virtually every year there is some story about the biggest economy in the world. And the absolute size of an economy matters. A big economy often has more money to spend, whether that be on defence, education or the environment. Size provides some insulation from the vagaries in the wider world economy. But size can also make it hard to be nimble, to evolve with the latest technology and work practices. And size can be a result of past economic performance, not current economic outcomes.

There are two methods used when comparing the size of economies. One is to convert the size of an economy from their own currency to $US. The problem with this approach is that economic size can change both because of growth rate and currency movements. An alternative method is to use Purchasing Power Parity (PPP, measures the price of a similar bundle of goods and services across countries). The advantage of PPP is it takes into account things are cheaper in some countries (and therefore a similar-size economy can buy more goods). The disadvantage is that it is difficult to get exactly the same basket of goods and services across countries. 

Bodies such as the IMF prefer the conceptually better PPP method. I prefer the actual dollars and cents approach of using the $US.  

Over the past three decades the US has consistently been the largest economy in the world (as it has been since the 1920s). But it was not only that the US economy was the biggest economy in the world. For some time it has been the biggest economy in the world by some distance. In the 1990s and 2000s the US economy was larger than the next three largest economies combined. That is why developments in the US economy have been so closely followed.

But that has changed over recent years with the rise of China. Measured in $US terms, China was a bit over 10% the size of the US economy twenty years ago. Now it is around two-thirds the size (and in PPP terms it is already bigger). Another comparison is that about thirty years ago there were plenty of stories about Japan challenging US economic supremacy. But Japan never got to be much more than half the size of the US economy. 

The other economy that has grown strongly over the past couple of decades has been India. In 1999 India was the 13th largest economy in the world. By 2019 it has become the fifth largest. India has a young (and growing) population, and will be the most populous country in the world over the next decade. This will likely help India to become one of the three largest economies in the world over the next 10 years. 

More generally the trend has been that Asian countries have been shooting up the economic-size table. In addition to China, Japan and India, South Korea and Indonesia are currently amongst the 16 largest economies in the world (and over $US1 trillion in size). This trend most likely still has further to run.

Going the other way has been the relative decline of Europe. At the end of the 1990s half of the ten largest economies in the world were European. In the subsequent two decades Spain dropped out of the top ten. And all the other European countries dropped down a notch or two. The four largest European economies were 70% of the size of the US economy in 1999. Twenty years later they are just over half the size of the US economy (although the EU in aggregate is only about 10% smaller). With an aging (and in some countries declining) population Europe will likely continue to become a smaller part of the global economic cake.

Australia (and Canada) has broadly maintained its global economic ranking over the past three decades, a sign that both have performed relatively well. Australia has actually grown a little faster than the world economy, and is now a little over 1.5% of the global economy. 

Largest economy by decade ($UStr)




1.       US


1.       US


1.       US


2.       Japan


2.       Japan


2.       China


3.       Germany


3.       China


3.       Japan


4.       UK


4.       Germany


4.       Germany


5.       France


5.       France


5.       India


6.       Italy


6.       UK


6.       UK


7.       China


7.       Italy


7.       France


8.       Canada


8.       Brazil


8.       Italy


9.       Spain


9.       Spain


9.       Brazil


10.    Mexico


10.    Canada


10.    Canada


15.    Australia


13.    Australia


14.  Australia


Note:  Figures are at end decade, source:  IMF.

Growing pains

A more widespread used measure of economic success is the GDP growth rate. Over an extended time the growth rate of an economy is determined by a combination of a country’s population and productivity growth. The largest economies are rarely also the fastest-growing ones as it is easier for smaller economies to raise their productivity (because they can copy the good things from the bigger economies). Countries that have declining populations (or very fast-growing ones) also typically find it tougher to grow quickly. A very bad decade for an economy (caused by say, war or famine) can be followed by a very good one.

Over the past decade the only big economies that have also been amongst the fastest growing have been China and India. Amazingly, China made the top ten growth list in each of the past three decades. Although China and India are relatively big economies, their level of productivity has historically been well below that of the US making it easier for them to ‘catchup’. The rapid pace of China’s growth over the past three decades has caused problems (high debt, growing pollution, income inequality) that the Government is currently trying to address.

Top ten countries for annualised growth rate over 2010’s

1.       Ethiopia


2.       Nauru


3.       Turkmenistan


4.       Mongolia


5.       China


6.       Laos


7.       Ghana


8.       India


9.       Rwanda


10.    Cambodia


Source:  IMF, BOQ calculations

Developed country growth over the past decade has been far more subdued. Only Ireland (once dubbed the Celtic Tiger because its growth rates from the mid 1990’s-GFC was at Asian-economy speed) enjoyed an average growth rate in excess of 5% over the past decade. One of the reasons for Ireland’s strong growth was they bounced-back from a severe recession post the GFC. 

The next four countries on the GDP growth list are all based in Asia, helped by their close trading links with China. The four countries doing it toughest have been the four other European countries that suffered deep recessions post the GFC (Greece, Portugal, Italy and Spain). There has been some better signs recently for three of the countries, although the economic outlook for Italy remains subdued.

Australia GDP grew by around 2.5% over the 2010s. By Australian historical standards this a pretty modest pace of growth. And it has clearly not been strong enough given the (modest) rise in the unemployment rate and too-low inflation. But by developed country standards Australia’s growth rate over the past decade still looks reasonable.


From a standard of living benchmark what matters is growth per head of population (or per capita in the jargon). Over the long-term this number is mainly driven by productivity growth (although the age of the population can impact the size of the labour force). Ireland, Singapore, Taiwan, Korea and HK again led the 

developed country pack. Greece and Italy again trail. The bulk of developed countries experienced per capita growth of between 0.5-1.5% over the past decade. 

Two of the countries that have had the slowest economic growth rates over the past decade (Japan and Germany) do better on this measure. Their slower overall growth rates reflects their aging population (and in Japan’s case a declining one). But their better performance in per capita terms reflects a decent productivity performance.  

Australia does less well on this measure. Partly that reflects Australia’s very strong population growth. But it is also a result of a relatively poor productivity performance. And highlights why economists have been saying that policies to improve productivity are needed to sustainably improve Australia’s living standards.  



Overall, the US remains the major player on the world economic stage. But China (and India) are closing.  It is almost certain that Asia will become a still bigger part of the global economy over the next decade. And Europe a smaller part. Australia has been one of the better global performers. But a poor productivity performance means that the rise of living standards has been modest. An improved productivity performance will be the key in the 2020s for better economic outcomes. And for the Australian economy to feel on top of the world. 

This will be my last note for 2019. Best festive season to all readers, and may next year be one of health and happiness. There are few things we know about next year. One thing we do know is that next year we will (again) be living in interesting times. 



Peter Munckton - Chief Economist