- At the end of the G-20 summit, global leaders envisioned a world that's less US-centric.
- That's a revelation since the size of the US economy relative to the world economy has been shrinking for years.
- A smaller role for the US shouldn't be concerning for investors.
- This shift makes expanding investing horizons globally more important now than ever.
A strong close marked the end of a positive day (+1.0%) to end another positive week (+3.3%) for US stocks. A fourth consecutive week of gains has both US and global markets up nearly 25% since their March 9 low. Today also marked the end of the G-20 summit in London, where world leaders expounded a less US-centric economic new world order.
The proclamation of a diminished role for the US of A in the world economy might seem like the beginning of a global tectonic shift, but the US has actually been shedding relative economic might for years. Ten years ago, the US made up about 30% of the world economy. Today, the US accounts for a slimmer 23%. Don't fret—the US economy hasn't actually been shrinking over the past decade. On the contrary, real US GDP has been growing at a healthy average annual pace of 2.6% over the last ten years.
But the world economy has been expanding even faster—4.0% per year on average. That's because emerging countries like China, India, Russia, and Brazil have been growing by leaps and bounds. As a result, advanced economies in aggregate have decreased from over 65% of the world economy a decade ago to less than 53% today. In 2008, China overtook Germany as the world's third-largest economy. Now China has Japan's economy squarely in its sights. Similarly, Russia's economy overtook Spain and Canada last year, while Brazil also overtook Canada. This trend will undoubtedly continue as increased globalization boosts emerging countries' economies.
Although our relative size might be decreasing, the US will remain the biggest and arguably most important individual economy for the foreseeable future. After all, the US economy is still more than three times the size of the runner-up, Japan. And economic might isn't determined by the size of an economy alone. Factors such as economic diversification, depth of capital markets, enforcement of property rights, and many others dictate a country's true economic standing.
The decentralization of economy power shouldn't be concerning for investors. Strengthening foreign economies create tremendous opportunities for US and foreign firms alike. However, the meaningful, shift in global economic power does make it more important now than ever for investors to expand their investing horizons globally.