California Overtakes Japan to Become World's Fourth-Largest Economy — But Challenges Loom

New data from the International Monetary Fund (IMF) and the US Bureau of Economic Analysis (BEA) recently revealed that the US state of California has been ranked as the fourth largest economy globally. The state's GDP, amounting to £3.08 trillion ($4.1 trillion), surpassed Japan's £3.02 trillion ($4.02 trillion) and already accounts for 14.05% of the US GDP of £21.89 trillion ($29.18 trillion).

Outperforming The Nation

In a recent statement, the Californian government boldly claimed that California's economy is expanding more rapidly than the world's three largest economies. In 2024, the state posted a growth rate of 6%, outperforming the United States (5.3%), China (2.6%), and Germany (2.9%).

This robust performance reflects a broader trend, as California has maintained strong economic momentum over the past four years, averaging 7.5% nominal GDP growth annually from 2021 to 2024. However, early projections suggest India will overtake California's economic output by 2026.

California Governor Gavin Newsom said, 'California isn't just keeping pace with the world—we're setting the pace. Our economy thrives because we invest in people, prioritise sustainability, and believe in the power of innovation. And while we celebrate this success, we recognise that the reckless tariff policies of the current federal administration threaten our progress. California's economy powers the nation, and it must be protected.'

Goals to Protect the Californian Economy

One way Governor Gavin protected the Californian economy was to take legal action, filing a federal lawsuit last week challenging the president's use of emergency powers to impose wide-ranging tariffs.

The suit aims to halt what Newsom's administration describes as economically damaging trade policies that have disrupted financial markets, increased costs for businesses and consumers, and caused significant economic losses.

According to the lawsuit, the tariffs have already destabilised stock and bond markets, leading to hundreds of billions of dollars in damages. The governor's office warns that the economic fallout will likely intensify, with current projections indicating the tariffs could reduce the US economy by £75.03 billion ($100 billion) annually.

Robust Business Growth

California's leadership in new business formation, venture capital access, and the high-tech industry bolstered its economic strength. In 2024, the state maintained its top position in the US for new business starts and venture capital funding, attracting over £97.54 billion ($130 billion) in investments—accounting for half of North America's total venture capital inflow. This robust investment climate supports a thriving startup ecosystem, particularly in the artificial intelligence, clean energy, and biotechnology sectors.

Moreover, the tech sector's impact is significant, with over 200 startups contributing approximately £1.80 billion ($2.4 billion) annually to California's economy. Employment in the tech industry grew nearly 40% between 2013 and 2023, outpacing the overall economic growth of 17% during the same period. This synergy between innovation, investment, and entrepreneurship continues to drive California's economic expansion and solidify its status as a global financial powerhouse.

A Spike in Tourism

California's vibrant tourism and live entertainment sectors significantly benefit the economy. For instance, this year's Coachella Valley Music and Arts Festival, held over two weekends in Indio, attracted approximately 125,000 attendees daily, generating over £525.19 million ($700 million) in economic impact for the Coachella Valley region. The city of Indio alone earned over £1.50 million ($2 million) in ticket sales.

In 2024, travel-related spending in the state reached £117.34 billion ($156.4 billion), marking a 2.7% year-over-year increase and generating £9.45 billion ($12.6 billion) in state and local tax revenue. Events like the Acura Grand Prix of Long Beach alone delivered nearly £75.03 million ($100 million) in economic impact to the region.

Meanwhile, San Diego attracted 32 million visitors, resulting in a £16.51 billion ($22 billion) economic impact. Additionally, the 2024 Modernism Week in Palm Springs drew over 130,000 attendees, generating an estimated £51.02 million ($68 million) for the local economy.

Exerting Global Influence

California continues to exert global influence through innovation, cultural exports, and economic dynamism. This stature affirms the state's robust industries—from tech and entertainment to agriculture and clean energy—and reinforces its appeal as a hub for talent, investment, and international partnerships.

In the long run, California's economic clout provides greater leverage in shaping national and global policy discussions, attracts continued capital inflows, and strengthens the state's fiscal resilience. With strategic investments in sustainability, infrastructure, and education, California is poised to maintain its leadership position while addressing the challenges of inequality, climate change, and global competition.