U.S. Can Catch Emerging Nations’ Malaise; Developing Markets Not Only Are Much Bigger Today but Also Are Potentially a Leading Indicator, Not a Lagging One
September 5, 2013 Leave a comment
September 4, 2013, 6:16 p.m. ET
U.S. Can Catch Emerging Nations’ Malaise
Developing Markets Not Only Are Much Bigger Today but Also Are Potentially a Leading Indicator, Not a Lagging One
There’s no place like home. That is the message from most, but not all, economic data lately. It is also what global stock markets are saying. The S&P 500 is off its record high but is still up nearly 16% year-to-date—12.5 percentage points more than the Dow Jones Global Ex-U.S. Index. Strip out a resurgent Japan, and the gap would be bigger. Expectations are that Thursday’s closely watched nonmanufacturing index from the Institute for Supply Management will continue the hit parade. Economists polled by Dow Jones Newswires see a reading of 55, which is strongly in expansion territory. It would follow a surprisingly good 55.7 reading in the manufacturing index released Tuesday.
A feature of recent economic data is that, despite tax increases, sequestration and the Federal Reserve’s intention to slow bond purchases soon, the U.S. economy is surprisingly resilient. Also, Western Europe, long in the doldrums, is showing signs of recovery.
It is the emerging markets that have gone from bad to worse from the spring through the summer. Their stock markets and currencies also have been disproportionately hurt by financial markets’ reaction to rising U.S. bond yields.
That amounts to a sort of “decoupling” in reverse, says Deutsche Bank chief international economist Torsten Slok. That term was in vogue a couple of years ago when Europe was slipping into recession and seemed to be dragging the U.S. with it even as the developing world boomed.
The question is why. The weakness in India, Russia, Brazil, China and elsewhere may be due to sagging commodity prices and bursting domestic bubbles in assets such as property. Or it may just be a result of global investors yanking cash from these markets due to shifting opportunities at home.
The latter has happened before—for example, crises in Mexico in 1994, Asia in 1997 and Russia in 1998—without presaging a recession in the developed world. On the other hand, recessions in the U.S. have almost always led to more severe ones in emerging markets.
When the U.S. sneezed, developed Europe and Asia caught a cold while emerging markets got pneumonia. The danger today is that emerging markets not only are much bigger but also are potentially a leading indicator, not a lagging one. We aren’t in Kansas anymore.
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