Just when the global economy seemed to be on the mend, several emerging nations are finding themselves with balance of payments problems. Growth has slowed as current-account deficits widened. Despite modestly revising our 2013 Chinese GDP forecast upwards, we have cut our overall emerging-market growth forecast further: we now expect a 4.5 per cent gain in 2013 with 4.9 per cent the following year.
There has been a sustained deterioration in balance of payments positions since the global financial crisis. The vast majority of countries with worsening balance of payments positions are in the emerging world.
That need not be bad. Many successful nations, including the US and Australia, have run substantial deficits for long periods. Investors elsewhere happily pour excess savings into countries that appear to have robust long-term growth prospects alongside deep and liquid capital markets. But not all nations fare well: investors who bought southern European government bonds before the financial crisis found that rising labour costs, poor capital spending decisions and, eventually, much slower growth led to increased default risk.
There has been a sustained deterioration in balance of payments positions since the global financial crisis
Some smaller Asian nations’ current accounts have improved over the last five years and China’s economy may now be on the mend. However, India, Brazil, Indonesia, Turkey and South Africa have seen material deteriorations in their current accounts. Hot-money inflows have helped mask – and sometimes contributed to – rising local labour costs, slower productivity gains, consumer booms and sluggish investment growth.
Even as our growth forecasts fell, our current-account deficit forecasts have widened – a process seen before the eurozone crisis and ahead of the 1997-1998 Asian crisis. Current-account deficits are much smaller now, but remedial action is required. Plausible options include lower domestic demand, a weaker currency, higher local interest rates, tighter fiscal policy and structural reforms.
We have thus made sizeable further cuts to some of our forecasts. India’s growth will average less than 5 per cent in 2013 and 2014 while we think Brazil will struggle to grow at more than 2 per cent. The scope for long-term economic catch-up – thanks to urbanisation and South-South trade – remains, but easy money and poorly developed domestic capital markets have triggered sufficient capital misallocation to dent near-term prospects.
Our forecasts for the developed-world growth have nudged higher, to 1.1 per cent in 2013 and 1.7 per cent in 2014. That’s largely thanks to Shinzo Abe’s Japanese stimulus measures and some cautious signs that the worst may be past in the UK. Even so, Japan’s rising prices may not be matched by wage increases, potentially crimping consumer spending, and the UK is one of the few Western nations not to engineer an improved current account. For all the talk of economic rebalancing, UK growth appears to depend yet again on ramping up the housing market. And although the eurozone picture has modestly improved, a robust recovery seems far away.
Meanwhile life looks a lot less certain for those who expected the US Fed to start tapering in September. For both the Fed and the Bank of England, linking monetary decisions to the unemployment rate initially appeared to make sense, but there is more than one reason why that rate may end up lower than expected. The persistent decline in the US participation rate suggests its labour market – and, indeed, the broader economy – is weaker than the headline jobless numbers suggest.
So future policy actions may be defensive measures originating in the emerging world, not pre-emptive “recovery” measures in the West. Policymakers have merely played “pass the parcel” – shifting leverage problems from one part of the world to another without safeguarding a robust recovery.
Indeed, trying to kick-start global growth by resorting to printing presses may be backfiring. Monetary stimulus helped the developed world avoid a deep depression but the imbalances that caused the global financial crisis are still being nurtured. The pursuit of faster growth at all costs may not end happily.
This research was first published on 26 September 2013.