Old Economies Rise as Emerging Markets’ Growth Falters

August 14, 2013

Old Economies Rise as Emerging Markets’ Growth Falters


The balance of world economic growth is tipping in another direction. Just as economists have begun lowering their forecasts for China and many other developing economies, the American economy is bouncing back. Japan appears to have turned a corner and is ending almost two decades of grinding deflation. Economic data out of Europe on Wednesday provided the first solid indication that many countries in the euro zone may be escaping the clutches of recession.The gross domestic product of the 17-nation euro zone grew at an annualized rate of about 1.2 percent in the second quarter. It is certainly not clear, based on only three months of data, that Europe’s recession has ended. But it is further evidence that the older engines of growth are revving into gear as the most recent sources of growth have been slowing down.

“The general proposition for much of the last generation has been that emerging markets grow faster. That’s what’s changed,” said Neal Soss, the chief economist at Credit Suisse.

“The acceleration such as it is happening is in the first-world economy rather than the emerging markets.”

The growth of the BRIC countries — BrazilRussiaIndia and China — has raised living standards in those nations and in others in Southeast Asia, Latin America and Eastern Europe. Those four nations had an even broader global impact by also providing new markets for American products while its citizens made the electronics and other products wanted by consumers in the United States and other developed economies.

So a decline in their growth rate should be worrisome to the United States. But Jim O’Neill, the Goldman Sachs economist who coined the term BRIC more than a decade ago, thinks one of the new beneficiaries of the shift in the global economy is most likely to be the United States. “I find myself thinking the U.S. is going to be one of the biggest winners,” said Mr. O’Neill.

It could gain from the Chinese government’s stated intention to shift from big government investment projects to a more consumer-driven economy. That could create demand for American products, while making commodities cheaper for American companies. Rising wages in China could also encourage manufacturing in the United States.

There were signs in recent trade statistics that this shift may already be under way. Exports from the United States to China grew in June while imports from China declined. The overall United States trade deficit dropped to its lowest level since 2009. China’s newfound restraint is at the fulcrum of the shift. Its government is trying to temper the economy, the largest among the developing nations. In doing so, it shoulders much of the blame for the slowdown elsewhere in Asia and in Latin America. The price of commodities like iron and copper, which previously buoyed the developing countries producing them, are now sinking as Chinese leaders are reining in the grand developments that needed metals.

Brazil was growing largely because of commodities like iron ore and soybeans, which it was exporting to China. Two years ago, the Brazilian economy grew 7.6 percent. This year, however, economists predict the number will be around 2.3 percent.

“After years of strong growth, many Brazilians grew optimistic, but for many people who improved their lot, there is now a sense that their potential to rise further is limited,” said Samuel Pessoa, a researcher with the Brazilian Institute of Economics at the Fundação Getúlio Vargas, an elite university in Rio de Janeiro. “People are worried.”

There is little prospect that the BRIC economies will ever return to the roaring growth that had come to seem normal.

“Many superficial observers just assumed that the BRIC countries would keep growing at the rate they did in the first decade, which was very unlikely,” said Mr. O’Neill, who recently retired from Goldman.

Mr. O’Neill said that as China moved to a more consumer-based economy, “the winners and losers of the new China are probably going to be quite different than the winners and losers of the old China.”

Even the most optimistic forecasts do not see the United States or Europe reaching the double-digit levels of growth that China and India have enjoyed over the last decade. Analysts are expecting that growth in the United States will rise from less than 2 percent this year to nearly 3 percent next year. Because the developed economies still account for nearly 60 percent of the global economy, even a slower pace of growth can provide more economic activity than faster growth in the developing world. There are fears that even the lackluster recovery in United States, Japan and Europe could be derailed if China’s problems grow significantly worse. Some economists in China are warning that Communist Party leaders may not be able to smoothly wean the country off years of government-fueled development.

For emerging economies, analysts say that the current cooling of growth is taking some of the countries to a more sustainable pace of expansion after years of acceleration that some considered unhealthy. In China, the 14.2 percent expansion seen before the peak in 2007 is not likely to be reached again, though the expected growth of 7.5 percent next year is still impressive.

“Even though it’s slowed down some, there is still a big opportunity,” said Barry P. Bosworth, a China expert at the Brookings Institution.

Brazil and India have deeper problems. India has not been hurt by falling commodity prices, but the economy has been constrained by corruption and inefficiency. The value of the Indian rupee fell recently to a record low against the dollar.

In Brazil, many economists say the declining value of the country’s iron ore and soybeans has revealed that Brazil’s leaders failed to invest in infrastructure when the money was pouring in.

Silvésio de Oliveira, a soybean farmer in the midwestern state of Mato Grosso and a vice president of his state soy and corn farmers’ association, said years of insufficient investment in highways and ports finally caused a crisis this year.

Mr. Oliveira said an “infrastructure collapse” drove up freight costs and led several big foreign purchasers, tired of waiting for deliveries that never came, to cancel their orders.

Carlos Langoni, a former governor of Brazil’s central bank, said that infrastructure had become a significant constraint on growth. But he also noted that some of the country’s problems are similar to those in other developing economies.

“Expectations were too high,” said Mr. Langoni, who is now the director of the Global Economics Center at the Fundação Getúlio Vargas. “The new emerging countries are no different from the old ones: once you reach a certain income level, it becomes harder to grow.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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