Background: Early childhood is a critical period for growth and development, yet the association with physical activity during this important period is unknown. The aim of this review is to critically summarize the evidence on the prospective associations between physical activity and health and development in children aged < 5 years. Methods: A systematic search in three electronic databases (Pubmed, PsycINFO, and Sportdiscus) was conducted to identify prospective studies examining the associations between physical activity (all types; specified by quantity) and health indicators (body composition, cardiometabolic health, bone health and risks/harm) or development (motor, cognitive and social-emotional development) in young children (mean age < 5 years at baseline). Two independent researchers assessed the methodological quality using the ‘Quality Assessment Tool for Quantitative Studies’ (EPHPP). This tool covers eight quality criteria: selection bias, study design, confounders, blinding, data collection methods, withdrawals and drop-outs, intervention integrity and data-analysis. Results: Thirty-nine studies, predominantly conducted in preschoolers (ages 3–5 years), were included of which nine were rated as high methodological quality. There was moderate evidence for a positive association between physical activity and motor (n = 11 studies) and cognitive development (n = 10 studies) based on consistent findings from studies having low-to-moderate methodological quality. There was insufficient evidence for an association between physical activity and body composition (n = 15 studies), cardiometabolic health indicators (n = 7 studies), social-emotional development (n = 2 studies) and bone health (n = 2 studies) based on inconsistent findings from studies having weak-to-high methodological quality. Conclusions: There is a need for more high-quality research in order to determine the dose-response relationship between physical activity and health and development in early childhood. Special attention should be paid to studies in children below the age of 3 years.