The World Bank's latest update to its "World Economic Outlook," survey, released in October of this year, is aptly titled "Transitions and Tensions." The document points out that the catalysts for global growth are in a state of flux, and predicts that developed economies will propel world growth in 2014, just as emerging economies cool off. To use a sports analogy, developing economies are executing a lateral pass to their slower growing, mature-economy teammates (who seem surprised to receive the football).
Given the fluid state of global economic drivers, which are the five strongest world economies going in to 2014? Some of them may surprise you.
Defining a "strong economy"
Healthy economies tend to exhibit several common characteristics, such as high GDP growth, low interest rates, low unemployment, a stable banking system, a young population, a firm current account balance, and burgeoning trade, to name a few.
When we start comparing countries relative to one another, however, there's no avoiding size: ultimately, a primary component of economic strength is the value of goods and services a country can produce. Sizeable economies provide supply to the global economy via their output, but they also propel the world's economic engine via their demand for raw materials, energy, services, and products.
Thus, in discussing which economies can be characterized as the strongest in the world heading into 2014, we will use the world's 15 largest economies as a starting point, each of which has total annual GDP in excess of $1 trillion. These countries are, in alphabetical order: Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, Mexico, Russia, South Korea, Spain, the United Kingdom and the United States. The results?
No. 1: the United States
The U.S. was the sleeper-hit of the global economy in 2013. Marked by a steady trend of GDP growth rate increases, surging stock markets, deficit reduction, and declining unemployment, the U.S. economy is brimming with short-term potential. When you include an energy boom, an entrepreneurial culture, low interest rates and the resurgence of manufacturing, you've got a recipe for continued expansion in 2014. And that expansion may no longer be so tepid: Third-quarter U.S. GDP was revised upward earlier this month from 2.8% to 3.6%. These factors, combined with the enormous scale of a $15.7 trillion GDP, portend a significant impact on the world economy in 2014.
While 2014 is the United States' oyster, beyond the short term, brooding clouds await. The threat of long-term budget deficits looms over the United States. In addition, continued political dysfunction has not only decreased the country's creditworthiness, but it's also diminished corporate confidence, a key ingredient for sustained economic growth. Finally, quantitative easing by the Federal Reserve is still a wild card: It's anyone's guess how the economy will absorb the absence of the Fed's bond buying in 2014.
No. 2: China
China continues to gleam with a number of superlatives to its name as we approach 2014: Of the 15 largest world economies, it possesses the highest GDP year-over-year growth rate at 7.8%. It also has the third lowest proportion of debt to GDP at 26%. China is trading partner to the world, with 124 countries identifying China as being their largest trading relationship.
But near term, newly installed Chinese President Xi Jinping has much to worry about within the placid administrative garden compound of Zhongnanhai in Beijing. GDP growth, while still torrid compared with that of developing nations, has fallen off recently from the 10% growth rate achieved many times over the past two decades: 7% to 7.5% may be a more sustainable rate for the next few years. The country is at the outset of a multi-year effort to transform from a producer economy to a consumer led economy, where the service sector will provide growth and stability for the working population.
While effecting this transition, Chinese leaders must deal with administrative and private-sector corruption, easing social ills such as pollution in major cities, and addressing income inequality between urban and agrarian populations. There's also the threat of credit bubbles in both the state-sanctioned credit markets and China's infamous "shadow banking" economy. To use the World Bank's terminology, 2014 will be a year of tension and transition for the world's largest country by population.
No. 3: Germany
Germany is one of the anchors of the world economy, and at $3.4 trillion annual GDP, it accounts for nearly 28% of the eurozone economy. Under Angela Merkel's steady leadership, the country has provided stability to the euro area while taking advantage of a weaker euro over the past couple of years to ramp up on exports. The country has the highest current account balance as a percentage of GDP among the world's 15 largest economies. A high current account balance indicates that a country is a competitive exporter with a high domestic savings rate.
Germany has encountered a speed bump this fall, as unrevised numbers suggest that industrial output declined by 1.2% in October. However, given the country's dynamic economy, look for any slowdown to be temporary. Rather, if you belong to a eurozone country, keeps your fingers crossed that the locomotive continues to issue dense steam in 2014.
No. 4: South Korea
Of the 15 largest world economies, South Korea ranks 15th. But at 3.3%, its $1.1 trillion economy is growing at a faster annual rate than all countries in the group except for India (4.8%) and China (7.8%). The South Korean economy is characterized by manufacturing and technological innovation, a trait it shares with the United States. With each passing year, South Korea marks a transition from regional dynamo to global powerhouse. Brands such as Samsung, Hyundai, LG, and Kia are household names and account for billions of the country's output. South Korea just marked its fastest quarter over quarterly growth in two years, as GDP grew 3.3%.
Here's a caveat to consider: South Korea surprisingly has one of the older populations among leading industrial nations, at a median age of 39.7 years. While its population is not as aged as Germany's or Japan's (each near 46.0 median age), it doesn't have the youth of the U.S. or China (37.2 and 36.3 median age, respectively). The aging of the South Korean population represents a medium-term growth risk in an otherwise healthy economy.
No. 5: Japan
With its seemingly permanent state of deflation and flat economic growth, it's easy to forget that the tiny island nation of Japan has an economic output that's almost three quarters that of China's, despite having only 9% of the population, and less than 4% of China's landmass. At nearly $6 trillion of GDP, it's the only country that can be truly said to be in the same output league as the U.S. and China. Prime Minister Shinzo Abe's attempts to jumpstart the economy have been effective in 2013, and although the success of "Abenomics" will take time to ascertain, for now it has provided a fiery spark to an economy too large to ignore. Look no further than the previously moribund Japanese stock market, as measured by the Nikkei 225 Index: With just two weeks left in the trading year, it's returned a vertiginous 50% year-to-date.