A new, evolving economic stage
Published: 22 February 2010
All indications point to a shifting of the global economic fulcrum now in progress – from the developed world to emerging economies.
As the new driving force for development in a region and even in the global economy, major changes in an emerging market are likely to reverberate throughout neighbouring economies.
As the world tries to find its way out of the global financial crisis, economists are talking about emerging markets-led recovery. The global financial crisis has only served to confirm that the falling of the dominoes in the west does not necessarily cause the dominoes in the east to fall.
In fact, data coming to the fore show that the relationship appears to be the other way around. The events in the rest of the world, with emerging markets as primary movers, are having a clear impact on the recovery of the US market which was hardest hit by the crisis.
From: "The Tipping Point," HSBC Global Research
What drives emerging markets?
- Emerging markets represent approximately 80 per cent of the world's population and 20 per cent of the world's economy
- Many emerging economies are in transition from centralised political and economic systems to more open market models:
- Relaxation of controls on foreign exchange
- Greater autonomy for financial institutions
- Transparency in the capital markets
- Removal of trade barriers
- Political reforms that in turn facilitate more change
- Momentum for reform is driven by the need to raise living standards, increase opportunities for the local population and attract foreign investment
Although many emerging markets continue to receive overseas aid, the most successful have broken that dependency by raising their capital markets to international financial and governance standards, thereby becoming more attractive to foreign investors.
An 'emerging markets' approach to global economics
HSBC Global Research analysts are redefining the relationships between economic events in developed economies, particularly the US, and the effect of these on the rest of the world. Even before the unfolding of the latest global economic drama, HSBC Group Chief Economist Stephen King had been asserting, "Tradition is wrong."
The performance of emerging markets in the years leading up to 2005 and since shows that the impact has gone in the opposite direction. When the USA struggled from a softening housing sector in 2005, analysts expected the rest of the world to follow suit and perform poorly. This didn't happen.
It appears that the dramatic performance of emerging markets and their continued demand for goods helped keep the US economy from slipping any further. Among the top three US export partners that year, two were emerging markets (China and Mexico). Other emerging market economies that made strong contributions to the US' export income were: Korea, Brazil, the United Arab Emirates (UAE), India, Chile, Turkey, Saudi Arabia, Taiwan, Russia, Argentina and South Africa.
Since US GDP represented roughly 30 per cent of global GDP in 2006, conventional analysis dictated that a weakness in the US market would lead to a dip in economic performance elsewhere. Weaker US investment demand, in particular, and domestic demand, in general, did exert a depressing influence on US imports from its trading partners. But the actual performance of emerging economies debunked conventional analysis.
For instance, forecasts for 2006 placed capital spending growth in China at 14 per cent. Actual performance, however, was almost double at 27 per cent. Mexico's GDP growth also surpassed expectations, driven by consumption and investments. The story was the same in the United Arab Emirates (UAE), another major emerging market. So despite lower domestic demand in the USA for goods from emerging markets, these economies continued to grow.
| Growth rates (% per year) | US | China | Mexico | |||
|---|---|---|---|---|---|---|
| Forecast 2006Q1 | Actual 31/1/07 |
Forecast 2006Q1 | Actual 31/1/07 |
Forecast 2006Q1 | Actual 31/1/07 |
|
| GDP growth | 3.3 | 3.4 | 8.9 | 10.6 | 3.4 | 4.8 |
| Consumption growth | 2.7 | 3.2 | 8.0 | 8.7 | 3.5 | 5.4 |
| Investment growth | 6.8 | 3.0 | 14.1 | 27.0 | 5.7 | 8.8 |
| Government spending | 2.5 | 2.1 | 5.0 |
6.0 |
2.5 | 4.0 |
| Export growth | 5.6 | 8.9 | 25.0 | 25.0 | 7.7 | 15.8 |
| Import growth | 6.9 | 5.8 | 20.0 | 20.0 | 7.1 | 16.3 |
Source: "A shifting centre of gravity," HSBC Global Research
More dominant role of trade, new preferred partners
This, in part, can be explained by the fact that emerging markets are creating a demand for their goods – among themselves – and among other developed markets, drastically redefining traditional trade relationships.
- China, the strongest emerging market economy, is now India's top trading partner (India being the second fastest-growing emerging market), effectively breaking US domination
- US now top buyer of India's exports, followed by the UAE
- India now the leading trade partner of the UAE, in close competition with China, edging out the US which used to dominate the market
- China is now Japan's top trading partner, overtaking the USA for the first time since the end of World War II
- China replaced Japan as Australia's biggest trading partner – a status Japan held for 36 years
- China now supplies most of the EU's imports, a role previously played by the USA
- China is now the USA's number two trading partner after steadily inching up from the number four position
In the new global, emerging markets-led economy, it isn't 'trade as usual'. Although emerging markets, particularly China, still deal heavily with the larger, advanced economies, there have been skyrocketing increases in intra-emerging nations trade.
From "Primal Knowledge: Still on Fire?," HSBC Global Research
A shifting centre of gravity
Most of us tend to think about the global economy from a US-centric point of view. After all, 'when the US sneezes, the rest of the world catches a cold'. Or does it? Recent developments suggest this approach is increasingly inappropriate.
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