The economic balance between developed and emerging economies is shifting, reversing trends of the past five years. While the rate of growth in non-OECD (Organisation for Economic Co-operation and Development) economies is expected to still outpace those of the OECD countries, the gap between them has shrunk since the global financial crisis.
Investors are responding to this shift — and rediscovering that, in real terms, the US adds more dollars’ worth of GDP to the global economy than China; Canada adds more than Brazil; and France more than Nigeria.
Nowhere is this rebalancing becoming more apparent than in Asia, where investors’ concerns have been heightened by slowing growth and plummeting currencies, which have exposed economic weaknesses in some emerging economies, such as in India and Indonesia.
Yet, economies under threat from a decline in investment funds are already fighting back — led by Asian tigers as they return from the ballot boxes,
having replaced economically redundant governments with more invigorated administrations.
Money goes West
The shift began when governments in many Asian countries, particularly in India and Indonesia, manipulated markets in 2012-13, leading to a variety of distortions, from state-directed lending to capital controls, trade protectionism and import substitution.
India has been quicker than Indonesia
to renew its commitments to a more liberal reform agenda, but a region-wide move towards greater market openness has not been quick, and investors will need convincing.
The shift has grown stronger as emerging market growth has been tempered by capital outflows to rich countries, largely because of the US Federal Reserve’s move to begin the lengthy process of normalising monetary policy by winding down quantitative easing (QE).
This movement of capital from riskier Asian assets into European and US investments has diminished the prospect of asset bubbles emerging in Asia. But there are areas that still merit concern. For example, analysts from the Economist Intelligence Unit (EIU) forecast a slump in property prices in Hong Kong in 2015 (although they say the downturn could
begin at any time), despite government interventions to cool the market. Fast growth in property prices is also emerging once again as a risk in Australia (although this is countered by a dramatic increase in the saving rate since the global financial crisis), New Zealand, Singapore and particularly in Malaysia, where household debt has risen alarmingly.
Meanwhile, the EIU’s expectation for accelerated GDP growth — projecting the world economy’s best performance since 2011 — is led by progress in the ‘rich countries’, such as the US. The first synchronised economic expansion in four years in the US, Japan and the Euro Zone is expected to have positive spillover effects for the rest of the developed world.
The EIU expects world GDP to grow by 3.6% in 2014. If this forecast is realised,
it would not only be an improvement on the 2.9% rate of growth in 2013, but would also mark an improving outlook for the ‘rich world’.
The US, the Euro Zone and Japan collectively account for close to half of global output, and their combined expansion in 2014, as forecast by the
EIU, would push overall growth in the OECD to 2.2%, a full percentage point higher than in 2013.
“India has been quicker than Indonesia to renew its commitments to a more liberal reform agenda, but a region-wide move towards greater market openness has not been quick, and investors will need convincing.”
Influence of the US
Leading the pack, the US is strengthening its economy and real GDP is growing. Employers have been creating almost 200,000 net new jobs per month, and consumer and business sentiment has been buoyant. Car sales are surging — in the US in particular a strong indicator that favourable economic times are returning. The EIU expects economic growth in the US to accelerate to 2.6% in 2014, up from 1.7% in 2013.
Yet, the prospect of gradually tighter monetary policy in the US is the one significant risk to the global recovery that looms in the next few years, says the EIU.
After pumping more than USD 3 trillion into the US and global economies since the financial crisis of 2008-09, the US Federal Reserve is reversing course and fading out its QE programme.
“This will not, in itself, constitute a tightening of monetary policy so much as a reduction in stimulus,” say EIU analysts. Nonetheless, the whole transition has major implications given that economies and financial markets have become accustomed to cheap money in recent years.
The mere hint that a ‘tapering’ of the Fed’s USD 85 billion-a-month bond-buying programme was being put together prompted the big sell-off in emerging-market assets and currencies, and pre-empted possible further world market shocks when QE ‘tapering’ begins in earnest.
Meanwhile, predictions from the International Monetary Fund (IMF) follow suit. The IMF — while predicting ‘uneven’ global growth, yet nevertheless net global growth of 3.6% for 2014 — has highlighted the prospect of financial turbulence in emerging markets and still more big capital outflows.
The size of some developing countries’ current account deficits is also a cause for IMF concern. Forecasts for the BRICS nations, of Brazil, Russia, India, China and South Africa, have been either reduced or unchanged by the IMF. By comparison, the IMF has upgraded its growth projections for the UK, Germany, France, Spain and Canada.
Japan, meanwhile, has been bucking the trend and is the one major advanced economy to be downgraded by the IMF (to 1.4% from 1.7%). Analysts have raised concerns that a rise in Japan’s sales tax may hamper growth. The IMF has also raised concern about the effect on Japan of a drop in emerging market GDPs.
Fightback for prominence
Signs of stabilisation in China’s economy — which saw growth accelerate to 7.8% year on year in the third quarter of 2013, scotching concerns about a hard landing — are triggering the fightback in Asia. The world’s second-largest single economy is expected to continue its structural slowdown in 2014, but Chinese demand for imports remains robust, albeit weakened.
Chinese growth is expected to continue easing, from 7.7% in 2013 to 7.3% in 2014, according to the EIU, as the authorities tighten credit and as a secular shift towards more sustainable rates of economic growth continue.
In India, the outlook is showing signs of improvement after a difficult couple of years. The economic revival is being supported by buoyant export growth, partly as a result of the weak rupee. EIU analysts forecast real GDP growth of 6% in fiscal year 2014-15, up from 4.9%.
The transition economies of Eastern Europe had another difficult year in the run-up to 2014. GDP growth is expected to fade to 1.4% as a marked slowdown in Russia, following political upheaval in Ukraine, compounds still-weak conditions in east and central Europe.
But a broad-based, if muted, improvement across the region is in prospect. Stronger demand in Germany and the Euro Zone is expected to boost Eastern Europe’s exports. Fiscal policy will also support recovery as the need for austerity becomes less acute (most of the biggest adjustments have already been made). In Russia, lower inflation should enable the central bank to cut interest rates, spurring a pick-up in GDP growth. Taken together, the EIU predicts these factors will push regional growth up to 2.9% in 2014.
“The mere hint that a ‘tapering’ of the Fed’s USD 85 billion-a-month bond-buying programme was being put together prompted the big sell-off in emerging-market assets and currencies”.
Latin America endured an economic slowdown in 2013, on the back of less-favourable conditions in capital markets and weak demand in Europe and China, which has hit South American commodity exports. Brazil, the region’s largest economy, is also paying the price for inadequate investment, say EIU analysts. But elections and the football World Cup should boost Brazil’s economy in 2014.
In the region as a whole, the EIU forecasts that GDP growth will accelerate to 3.2% in 2014, lifted by stronger global conditions.
Political unrest and instability continue to hamper economic growth in the Middle East and North Africa region.
The Syrian civil war shows all the signs of being prolonged, leading to long-term economic damage.
More positively, the deal agreed between Iran and the permanent members of the UN Security Council plus Germany reinforces the slightly improved outlook for the Iranian economy. However, the fact that key oil and financial sanctions remain in place, combined with the difficulty of restarting oil production, means that the Iranian economy will remain weak, despite returning to growth in 2014.
The EIU expects regional growth to recover to 3.7% in 2014, aided by oil revenue in Saudi Arabia and
the Gulf states, but the medium-term economic outlook remains uncertain given the scale of current political unrest.
Sub-Saharan African growth is expected to pick up from 3.7% in 2013 to 4.5% in 2014, accelerating to 6% by 2018, on the back of stronger global demand, mining investment and the expansion of the middle class. That said, the mixed outlook for commodity prices could affect future investment levels, potentially jeopardising growth.
Economic shift outlook
Exchange rates will provide one of the clearest triggers for global economic trends during 2014-15. Many emerging-market currencies have been volatile against the US dollar since the Federal Reserve first hinted at a reduction in its monthly bond purchases — and that volatility has returned as improving US economic data has renewed investor anticipation of QE tapering.
Indeed, currencies in countries with fiscal or current-account woes, especially India, Brazil, Indonesia, Turkey and South Africa, are said by analysts to be held hostage to the Federal Reserve’s shifting views on the future of its bond-buying programme.
On balance, the immediate future seems set for investors to continue their new-found acquaintance with the world’s reliable GDP generators — but investors’ memories will inevitably fade over time as they seek better returns, and their compulsion towards riskier endeavour returns. After all — there’s nothing like an emerging market to get the blood racing.
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