The Wednesday Letter #225 - 6/19/2024

THIS WEEK: G7 and BRICS in the Global Economy; PPP vs. Market Rates, GDP vs. Wealth Creation; Albemarle/Lithium; Private Equity Zombie Funds; The Two-Speed Narrow Market.

G7 AND BRICS IN THE GLOBAL ECONOMY

Leaders of the G7 economies met last week in Italy for what was the group’s 50th summit since its creation. The G7 are the United States, Canada, Japan, Germany, France, Great Britain, Italy. They were also joined by a representative of the European Union, as has been customary at recent summits. And at this particular summit, Italy’s prime minister Giorgia Meloni had also invited India as an “outreach country” in the person of prime minister Narendra Modi.

The size of the combined G7 economy is formidable but its share of global GDP has been decreasing for decades, mainly because of faster growth in China and other emerging markets. This chart shows the declining share of global GDP for the G7 and the growing share of the BRICS countries (Brazil, Russia, India, China and South Africa), on a purchasing power parity (PPP) basis. The G7 were 43.5% of the global economy in 2000 and they are now 29.9%. Conversely, the BRICS were 18.2% in 2000 and are now 32.1%. This means that total BRICS GDP has surpassed total G7 GDP, if we accept the PPP adjustment.

Of the G7’s total GDP, the US accounted for 59%. And of the BRICS total GDP, China accounted for 63%. The future trajectories of the US and of China will essentially determine the relative weights of the G7 and BRICS in the global economy.

Some people may object to the use of PPP on such a grand scale. Using PPP exchange rates makes sense to compare costs on a micro level, for example the cost of a hamburger or of a haircut in New York vs. in Rio. But the entire economy is probably too complex for PPP calculations and comparisons.

The chart below from Visual Capitalist shows raw GDP figures at currency market rates instead of PPP rates. It shows that G7 total GDP is still 50% higher than BRICS GDP, even after the inclusion of new members in the BRICS. With India the ascending power thanks to its demographics and ambitions, it should be no surprise that prime minister Modi was invited to the G7 summit.