A forex transaction is the exchange of one country or economic region’s currency for another. As such, forex traders need to keep abreast of the status of the world’s largest economies to ascertain how the shifting of the global economic landscape might impact the currency market.
The most common way to track each country’s global sway is to look at the relative GDP (Gross Domestic Product) of each nation.
It’s wise to familiarise yourself with the world’s biggest economies and their ranking in the global pecking order so that you can track their performance, growth, or waning influence on the world stage.
According to the most recent GDP data, these top 6 countries account for a gigantic 55% of the world economy.
The United States of America – The World’s Largest Economy
It should come as no surprise that the US comes in at number one, being as it has been the world’s largest economy since the 1920s.
The US accounts for a whopping 25% of the world’s GDP, and as such it’s the key GDP report to watch when thinking about the global economy. It’s also a key trend indicator as it relates to the currency pairs that include the USD.
Several factors contribute to the enormity of the US economy. A capitalist environment that places a lot of emphasis on hard work and entrepreneurship is a major contributing factor. It also purposely avoids much of the regulation that, although may be socially desirable, leaves other countries with less potential for economic growth.
A long and successful tradition of advanced research in the areas of pharmacology and technology also contribute hugely to the titanic companies from those categories in the US.
GDP: $19.48 trillion
GDP Growth: 2.27%
GDP per Capita: $59,939
Share of World GDP: 24.08%
#2 – China – Closing The Gap
Over the last few decades, the Chinese economy has been bridging the gap to the US in terms of sheer size. In fact, if measured in terms of GDP based on Purchasing Power Parity, which is a preferable indicator for many analysts, China relegates the US to number two and takes top spot as the world’s largest economy.
China has completely transformed its centrally planned closed economy from the 1970s to the global exporting and manufacturing behemoth of today. The country has been the largest contributor to global growth since 2008, and the use of its currency, the Renminbi, for use of settlements has become widely accepted.
Chinese GDP is key for sustained global growth of world economies, and it should never be looked at by traders in isolation. An unexpected rise or fall of GDP in China will heavily impact the forex markets. Investors may rush to safe-haven assets like the US dollar or gold if GDP suffers, while a healthy GDP will invite more appetite for “riskier” currencies like the euro.
GDP: $12.23 trillion
GDP Growth: 6.9%
GDP per Capita: $8,612
Share of World GDP: 15.12%
#3 – Japan – Stuck In The Mud
Although the country accounts for only 1.6 percent of the world’s population, Japan’s economy heavily outranks its population to come in at number three with the size of its economy.
Japan is continuously ranked as one of the most innovative countries in the world, especially in the technology space. It is the world’s second-largest exporter of cars around the world, with the likes of Toyota, Mitsubishi, Honda and Hyundai all headquartered in Tokyo. It’s also the world’s largest electronic goods manufacturer, with Sony, Toshiba, Canon and Panasonic all operating out of the East Asian island country.
Japan has been in the grips of a recession since 2008, exacerbated by the devastating earthquake and tsunami that rocked the country in 2011. Traders should take heed of Japan’s GDP figures to see how the numbers will affect the Japanese yen and the US dollar.
Like the dollar, the yen is considered a safe-haven currency, and its recent economic struggles have only heightened demand for the currency. The Bank of Japan is known to take frequent measures to try and keep the yen value down in order to stay competitive in the export market.
GDP: $4.87 trillion
GDP Growth: 1.71%
GDP per Capita: $38,214
Share of World GDP: 6.02%
#4 – Germany – Queen of Europe
Coming at number four is the powerhouse of Europe. Germany is a big deal across the world, best known for its exports of cars (Mercedes, BMW, Audi, VW), medicine (Bayer, Merck), and household electronic equipment (Siemens, Sennheiser, Grundig).
In addition, a large driver of its economy is its service industries, including logistics (DHL), banking (Deutsche Bank), and tourism.
Like the US, Germany is a nation that values open-market capitalism, although with a much sturdier system of social services. The European giant has a highly skilled workforce, excellent infrastructure and a long history of technological expertise.
German GDP heavily influences the euro. A high growth rate in the German economy tends to be positive for the euro, while a contraction in GDP tends to steer investors away from the common currency in search of safer bets.
GDP: $3.69 trillion
GDP Growth: 2.22%
GDP per Capita: $44,680
Share of World GDP: 4.56%
#5 – India – A Rising Star
With 1.3 billion inhabitants, India is the world’s largest democracy, the world’s most populous country, and the fifth largest economy in the world. India has a rapidly expanding base of agriculture (17 percent of GDP), services (57 percent of GDP) and manufacturing (17.5 percent of GDP).
India is the fastest growing economy in the world according to GDP figures, as the country continues to implement key policies that are accelerating foreign investment, with investors rushing into position themselves in this budding giant of the global economy.
Some of these policies include reforms to remove sluggish bureaucracy, a reduction of minimum capital requirements for investment, and a simplification of the way foreign investors go about acquiring requisite licenses across different sectors.
The growth or contraction of GDP in India can affect the USD, as when the economy is in trouble, it tends to offload its reserve of dollars, which can have a detrimental effect on the price of the greenback.
GDP: $2.65 trillion
GDP Growth: 6.68%
GDP per Capita: $1,980
Share of World GDP: 3.28%
#6 – The United Kingdom – Brexit
The services sector is the largest contributor to the UK economy, accounting for more than 75% of GDP. This sector mainly comprises financial services (think HSBC, Barclays), retail consumables outlets (supermarkets like Tesco, Sainsbury’s, M&S) and entertainment (the Premier League and the British film industry).
The 2016 referendum that unleashed Brexit has dominated all analysis of the UK economy over the last four and a half years. Since the vote, the overriding sentiment surrounding the UK has been one of uncertainty. Because of the protracted timeline, and because the “crunch” year of 2020 was dominated by the effects of the global pandemic, this sentiment remains largely unchanged, as investors largely play a “wait and see” game with regard to how to invest in and out of the UK in the years ahead.
The UK economy is disproportionately influential in the forex market, with London being one of the world’s eminent financial hubs, through which hundreds of billions of dollars worth of currency is transacted every day. Keeping well informed on the UK’s GDP, and developments regarding Brexit, are critical for traders wishing to trade the GBP and the euro.GDP:
GDP Growth: 1.79%
GDP per Capita: $39,532
Share of World GDP: 3.26%
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