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China, India to be world's top economies by 2035

A Societe Generale economist said higher education and urbanisation would help India and China become the world's biggest economies.

india Updated: Feb 17, 2006 09:11 IST

Changing demographics in China and India are driving growth in the Asian giants as they chart their course towards becoming the world's two largest economies by 2035, a Societe Generale economist said on Thursday.

"Progressively, the skill set of the population is growing," Glenn Maguire, Asia Pacific Chief Economist at the French bank said on the sidelines of a conference.

"If you have a highly skilled force which we are starting to see in China and India... the mass of the economy starts to expand exponentially."

He said that higher education and urbanisation in China and India would help them become the world's biggest economies based on purchasing power parity.

By 2035, the US and Japan, currently the biggest and the third-largest economies respectively, would be relegated to No. 3 and No. 4.

The Japanese economy, which is recovering from a near-decade phase of stagnation and deflation, would see real interest rates remain in negative territory at least until 2007 and this would support financial asset markets in that country, Maguire said.

"The exit trajectory from deflation appears to be very steep in Japan ... (negative) real interest rates will be an inflationary dynamic across asset classes," he said.

He expects real interest rates to slip to a negative 1-1.5 per cent and that suggested a 30-40 per cent upside for the benchmark Nikkei average.

Maguire predicts the Bank of Japan (BOJ) will raise short-term interest rates to 0.25 per cent in the fourth quarter this year, from zero now, but he expects inflation to rise at a faster pace.

He forecasts a consumer price index reading of 0.6 per cent by March and one per cent by June.

Speculation is rife in financial markets that Japan's central bank will end its ultra-easy monetary policy within a few months.

But despite an expected return by the BOJ to a policy of interest rate targeting, Maguire said the yen would continue to be a funding currency in global financial markets.

"The interest rate structure will remain very low in Japan relative to other economies," he said.

First Published: Feb 17, 2006 00:26 IST