For years we have had a two-speed global economy composed of constrained advanced countries offset by strong growth in the emerging world. The emerging world now accounts for more than 50% of world GDP and it was hoped it would keep the world growing at a reasonable rate.
Over the past year, though, it has become readily apparent that even emerging countries, led by Brazil, India and China are struggling, with all seeing a sharp slowing in growth.
This slowing is also evident in business conditions indicators.
So what’s gone wrong and how big a threat is this to global growth and investment markets?*
The slowdown in the emerging world and specifically Brazil, India and China (BICs) has a number of common factors.
A big part of it is the growth slowdown in advanced countries driven by recession in Europe and more modest growth in the US. Apart from dampening business confidence this has directly affected exports, particularly in China and Brazil where 20% or more of exports go to the European Union. This has adversely affected export demand resulting in a slump in exports to just 1% year on year growth in China and 10% growth in Brazil from a 20% plus pace a year ago.
A lagged response to policy tightening to slow growth: The BICs and most emerging countries saw a strong rebound in growth coming out of the GFC. This along with the post GFC rebound in commodity prices resulted in rising inflation which in turn led to policy tightening in order to bring economic growth back to a more manageable level. As a result, interest rates were moved higher in all three countries and fiscal policy was tightened. Currency appreciation also added to the tightening in China, and particularly in Brazil as the Real surged in value.
Structural change has also played a role, as a combination of the need to aim for more balanced growth
(China) and a lack of further economic reforms and imbalances has highlighted that potential growth in these countries is somewhat below what had been achieved in the years before 2008.
In terms of the latter, the issues vary from country to country and range from mild in the case of China to significant in the case of India.