Posts Tagged ‘emerging economies ’

A Tale of Two Economies

Tuesday, November 15th, 2011

Booming São Paulo

The West and the Rest

This is a tale of two economies with interlocking features. One has excess supply; the other has gnawing demand. In the West, economic growth is slowed while emerging markets are busting at the seams. An explosion in the number of urban, middle class consumers and related factors is powering growth in emerging markets.

The World Bank estimates that, on average, emerging nations will grow by 4.7 percent – double that of developed countries — through 2025. That growth isn’t only evident in the so-called BRIC nations, but in Turkey, Indonesia, South Korea, and across the developing world. Some of the fast growing regions are in Sub-Saharan Africa.

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Decoupling Emerging Markets

Sunday, March 16th, 2008

There is a lot of confusion about emerging market economies (EMEs) and the economic notion of “decoupling”.

First off, the term ‘emerging markets’ was coined in the ’80s to describe rapidly growing economies with low-to-middle per capita income. They comprise over 80% of the world’s population, representing about 20% of the world’s economies.

Countries that fall under this umbrella are incredibly diverse ranging in size from (Singapore) to massive (China and India). They’re growing at varying speeds—merely “quick” (South Africa, Mexico and Chile) to “breakneck” (China, India, and the Gulf states).  And, their fortunes are linked to those of developed economies. In fact, many economists hold that when the United States sneezes, the EMEs catch pneumonia.

Or do they? Not so much, say advocates of the “decoupling,” the notion that emerging markets are broadening and deepening to the point where they no longer depend on the mature markets for their growth.  Decoupling accounts for emerging market stocks’ overperformance these last few years.  But is decoupling really happening?

Last May, Merrill Lynch economist David Rosenberg, told the NYT’s Daniel Gross, “I find it hard to believe that the rest of the world is going to be immune to a consumer sector that’s primarily responsible for pulling in nearly $2 trillion of the world’s output.”  His take was, “Before we can say there’s a decoupling, we have to wait for a sneeze—all we’ve had is a runny nose.”

The U.S. economy sneezed (sub-prime mortgage crisis) and coughed (credit crisis). The U.S. economy is sounding more bronchial by the day.

Mr. Rosenberg, and his cohorts may have been vindicated. In January EME stocks were rocked. And, they failed to get much relief from the medicine–$145 billion stimulus package. Hong Kong’s main index dropped 5.5% — its biggest loss since Sept. 11, 2001—while India’s fell by 7.4%. Even Brazilian stocks — darlings of the EME — dropped 6.6%.

There is some degree of decoupling. While certain markets—mature and developing—are susceptible to certain market forces other markets simply aren’t because today there are lots more variables at play.  The global economy is growing up rapidly and relationships among markets are becoming more complicated.

This increasing complexity is due to the fact that resources no longer flow exclusively from mature markets to emerging regions as they had in the past. For example, both the GCC’s and Africa’s mineral resources are being hungrily devoured by China to the benefit of all three economies. This is conferring a protective effect on them which wasn’t possible in prior cycles.  Flows of knowledge and capital are becoming omni-directional and multifaceted.

So?  It’s a classic “good news, bad news” story for mature economies, like the U.S. and EU. The good news: healthier, emerging markets can continue to buy products from mature economies like U.S. and Europe, hastening their recovery.  But the bad news: the price of oil will likely remain higher, longer — despite the reduced demand for oil among mature economies.

And, let’s consider the implications for Western product-service providers who see opportunities for delivering services to some of these EMEs.