The Emerging Slump
Every now and then, the developed and emerging economies of the world find themselves in sync, growing or contracting together. This is not one of those times. In late 2015, a trend that started in 2014 accelerated, as the balance of global growth is tilting toward developed markets and away from emerging ones. Whereas Credit Suisse economists expect growth in developed economies to accelerate this year—up 1.9 percent versus 1.7 percent in 2014—they forecast slower growth in emerging ones, up 3.6 percent versus 4.3 percent last year.
That the slowdown in China is at the heart of the emerging world’s troubles should come as no surprise—the country currently accounts for 30 percent of global industrial production, double the proportion in 2008. Chinese export growth has slowed from an annual average of 25 percent between 2003 and 2007 to just 8 percent between 2010 and 2013. Manufacturing investment growth has fallen from nearly 50 percent in 2007 to single digits in 2015. The slowdown owes something to the law of large numbers, and the difficulty of a country that already accounts for nearly one-third of global industry to continue to grow exports and investment. Ironically, slowing Chinese trade growth reflects China’s success, say Credit Suisse’s economists.
But that slowing growth presents a serious challenge to those countries that have become important trading partners with China. Asian countries, in particular, have come to depend on China’s appetite for imports—Korea, Malaysia, and Taiwan export twice as much to China as a share of their GDP than they do to Europe. China’s waning appetite for palm oil, for example, has hit Malaysia, Indonesia, and Thailand particularly hard. Thailand has also suffered from a decline in the number of Chinese tourists this year.
While many Asian central banks began easing monetary policy at the beginning of the year to combat slowing growth and the threat of deflation borne of low oil prices, and most (save Malaysia and the Philippines) are still in easing mode, a number of governments have tightened fiscal policy. India has removed government controls on the price of diesel fuel, while Indonesia did the same thing and got rid of gasoline subsidies to boot. For its part, Thailand ended an expensive rice subsidy in 2014.
While Indonesia and Thailand have both introduced stimulus packages in recent months, Credit Suisse doesn’t consider either one particularly meaningful. Thailand’s spending on small construction projects mostly shifts the timing of government expenditures from 2016 to 2015, rather than adding new stimulus funds. (The move could increase GDP growth as much as 0.4 percent in 2015, but stands to hurt growth next year.) Meanwhile, Credit Suisse’s Head of Southeast Asia and India Economics and Strategy, Santitarn Sathirathai, calls Indonesia’s varied program, ranging from tax holidays for certain industries to easing restrictions on foreigners owning apartments and opening bank accounts, “more of a supply-side reform package than domestic demand stimulus measure.” All told, Credit Suisse expects growth in every Asian country except India and the Philippines to miss consensus forecasts this year.
The difficulties extend beyond Asia. Prices for iron ore, of which Brazil is one of the world’s largest producers, have declined alongside Chinese demand, hurting the mining industry. Brazil is also coping with a corruption scandal at its largest oil company and has no room for either fiscal or monetary easing. The central bank is battling high inflation with interest rate hikes, and credit rating agencies have threatened a downgrade if the government can’t reduce its deficit. Brazil has exported its way out of prior growth slumps, but with sluggish Chinese demand for the commodities that account for two-thirds of its exports, that trick will be harder to pull off in the current environment. Indeed, Credit Suisse economists expect the Brazilian economy to contract both this year and next.
China isn’t to blame for everything. The collapse in oil prices—Brent crude has dropped to $47 a barrel from its June 2014 peak of nearly $115—has been incredibly damaging to energy-producing economies in the emerging world. Russia’s recession worsened in the second quarter of 2015, with a 4.6 percent decline in GDP. In Malaysia, the oil and gas sector accounts for one-third of government revenues—hence the aforementioned spending cuts.
Finally, emerging markets will have to contend with any hike in interest rates by the U.S. Federal Reserve. Their currencies are already doing so, battered by the combination of an expected rate hike, weak exports, and soft domestic demand. Many have dropped significantly against the dollar since the beginning of the year, including the Turkish lira (-31 percent), Brazilian real (-46 percent), Malaysian ringgit (-24 percent), and Russian ruble (-17 percent).
With emerging markets on the back foot, any global growth is going to come from developed markets, particularly the U.S. and Europe. After declining for five consecutive months, U.S. industrial production is growing again, and car sales in July were the highest in nearly a decade. In Europe, consumer and business confidence has been strong, retail sales are above trend, and housing demand is improving. For now, it looks like the growth trajectories of the developed and emerging markets are diverging, with developed economies proving resilient to both weakness in China and the knock-on effects in other economies. If things get much worse in emerging markets, though, we might just find ourselves back at one of those times when everybody’s back in sync.
