Since the outbreak of the financial crisis in 2008, the pattern of the world economy has undergone great changes. According to recent IMF data, the average global economic growth rate in 2011 was 4.2%, only 2.2% in the developed countries, while the emerging economies reached up to 6.4%. The IMF also forecasts, that during 2012-2015, the world economy will grow by 4.6%, with developed countries contributing only 2.5%, and the emerging economies up to 6.6%.
However, since the second half of 2011, signs have pointed to a global growth slowdown in many emerging economies. This trend has continued into 2012 in these emerging economies, with many people beginning to question the future of emerging economies as a new engine of world economic growth.
Turning first to the BRICS countries, India’s economy is currently slowing down markedly, with its GDP growth falling to its lowest level in nearly three years. India has been affected by the reversal of international capital flows, diminishing demand in its export market due to the impact of recession and crude oil price volatility. The Indian rupee has devaluated, while inflation is currently rebounding. This higher inflation rate has put India’s macroeconomic policy in a dilemma by narrowing India’s central bank’s ability to maneuver by cutting interest rates to stimulate economic growth. India’s economic downturn is also reflected in a higher fiscal deficit and higher current account deficit. Additionally, some international rating agencies have downgraded India’s sovereign debts, which may lead to the rise in India’s financing costs.
After more than a decade of adjustment and reform, Brazilian public finances have greatly improved, with the net national debt/ GDP ratio lowered from 60% in 2002 to 37% in 2011, the proportion of foreign currency debt in total public debt is reduced from 40% to 4%, and Brazilian foreign reserve is adequate. However, since the second half of 2011, affected by the debt crisis in Europe, especially by the negative impacts of the Spanish financial institutions, the growth rate of the Brazilian economy began to decline. The Brazilian central bank lowered the interest rate from 12.5% in August 2011 to 9% in June 2012 to promote domestic consumption and investment. As a result, growth picked up in the first half of 2012. However, excessive credit growth has caused Brazilian asset prices to rise, leading some to worry about potential Brazilian asset bubbles.
Russia’s growth was better than expected in the first half of 2012, mainly because of higher prices in the international energy market in the first quarter. Russia’s oil and gas export revenues increased substantially, offsetting a 20% increase in government spending during the election period, thus allowing the federal budget to remain balanced. From the second quarter, the international oil prices began to fall, resulting in a decline in Russian exports and tariff revenue. According to Russian government estimates, the Russian government budget can only be balanced when the price of oil is above $ 115 / barrel. Therefore, movements in oil prices do not favor the Russian economy. But Russia has just joined the WTO, meaning Russian foreign trade and investment could undergo new structural changes. If the Russian investment environment improves, the economy is expected to grow faster.
Sub-Saharan Africa has recently undergone strong economic growth and is likely to be the only region in the world where the economic growth in 2012 will be higher than in 2011. However, South Africa, the last member to join the BRICS countries, has a bigger exposure to European financial risks because of its close ties with European goods and services and might experience a lower growth rate than in 2011.
China also has had a slower growth in 2012. The growth rate slowed in the first two quarters, and the third quarter has not seen the growth rebound. Several factors have contributed to this slowdown: firstly, decreased exports, mainly to Europe because of the debt crisis in the euro area; secondly, the withdrawal of government investment in public works and the slowdown in the housing market due to government intervention to reduce house prices to a more reasonable level; thirdly, firms are destocking because of falling prices and shrinking demand; and fourthly, consumption is slightly lower due to the downturn in the housing market and the market for automobiles.
In 2008, after the outbreak of the international financial crisis, emerging markets suffered from massive capital flight, credit crunch and a sharp contraction in world trade. Subsequently, the emerging economies such as China, India and Brazil have taken strong fiscal and monetary measures to fend off economic recession.
However, since 2012, economic growth in emerging economies has been affected by diminishing exports to Europe where the outlook for the euro-zone predicament is worrying. In some emerging countries, the level of non-performing loans in banks is also on the rise. Rising oil and food prices affect the inflation rate in these emerging economies, thereby limiting the possibility of further relaxation of monetary policy. In addition, in Western countries, public opinion has been questioning the sustainability of the high investment rate in China and many other Asian countries. People are wondering, whether loosening fiscal and monetary policies again would aggravate the overcapacity problem in the industrial sector by adding more capacity, thus rendering the structural contradictions more difficult to solve.
Today, the emerging economies can no longer pull the world economy alone. Credit easing in 2008 caused a series of follow-up effects, including high level of credits, the real estate bubble and rising non-performing loans. Therefore, many emerging countries find the room for maneuvering narrowing in monetary and fiscal policies. In addition, even if the governments of these emerging economies decide to expand credit again, they will face the diminishing effects of the policies, because unlike in 2008, there are no more easy projects of investment.
However, looking ahead, there are many factors that make people feel optimistic about emerging economies.
1. The emerging economies still have room to maneuver using macroeconomic policy to stimulate the economy. Recently, due to the decline in demand in emerging economies, commodity prices are also declining. For example, iron ore prices dropped by a third since April this year, almost entirely driven by weak Chinese demand. By the same token, the price of copper also fell into a downward spiral. Commodity price stability provides good conditions for the emerging economies to further ease monetary policy. In emerging economies, the public debt/GDP ratio is around 30%, while in developed countries this ratio is about 100%. That means the emerging economies still have leeway to adopt expansionary fiscal policy to stimulate the economy.
2. Emerging economies such as India and China are big countries in terms of population. They have a huge advantage given their market size. If the crisis forced the emerging economies into structural transition, they might be able to embark on a new development path. Some scholars believe that China’s economy is about to finish the economic take off stage, and may enter the age of mass consumption, pushed by accelerated industrialization. So China’s huge domestic market may become a new driving force for economic growth, provided that China adjusts its income distribution problem. In other words, there is a great potential to be tapped in emerging economies.
3. Emerging economies are increasing their cross border investment with each other, leading to rapid growth in trade and investment within emerging economies. That trend might become a new impetus for future world economic growth.
Emerging economies chose to participate in economic globalization, and have benefitted from it, by absorbing significant investment from developed countries. Since the financial crisis, after financial institutions of developed economies have withdrawn their investment in developing economies, firms from emerging economies have taken over and became the driving force of foreign investment in developing countries. China’s massive investment in Africa contributed a lot to the recent rapid economic growth there. As national leaders of the emerging economies are committed to developing trade and investment among themselves, this trend will lead to greater development in the future.
As China used to be US firms’ investment target of choice for some time, China’s exports to the US market have benefitted to a great extent by this sort of US investment in China. China’s economic slowdown may affect US firms’ investment intention, thus hurting US-Chinese bilateral trade in the long run. In the end though, it remains to be seen whether emerging economies will be the engine of growth for the future.
Ding Yifan is the Deputy Director of the World Development Research Institute at the Development Research Center of the State Council in China.
