Surprisingly weak trade data out of China have added to concerns that, after a spell of positive signals for growth in emerging markets this year, the outlook for EMs and the global economy is again looking bleak.
Adding fuel to such fears, a report from consultancy firm Capital Economics on Thursday says the accelerated growth of emerging economies in the 2000s was a one-off anomaly that cannot be repeated and that slower growth in EMs will be a significant drag on future global growth.
Beijing said China’s exports in September fell 10 per cent from a year earlier in dollar terms, much worse than expected, while imports fell 1.9 per cent, pointing to weakening Chinese and global demand.
As the Financial Times reported last month, demand for EM exports is already running at a post-crisis low, with weak US demand for Chinese goods bolstering concerns that the engine of global growth is stuttering.
The report from Capital Economics argues that EMs on aggregate have settled back to their long-term trend growth rate of 3.5 per cent to 4 per cent a year, well below a peak of 8.6 per cent in 2007.
This implies a weaker outlook for the world economy than the latest forecasts from the International Monetary Fund, for example, which expects EM growth to rise above 5 per cent a year by 2020 from 4.1 per cent this year.
Capital said the gap between its forecasts and the IMF’s would mean a difference of $20tn to the size of the global economy in 2030, roughly equal to the size of the US economy today.
In terms of the contribution of emerging markets to the global economy and of the relative pace of growth between emerging and developed economies, Capital noted, the years from 2000 stood in sharp contrast to the five decades from 1950, when average incomes in the emerging world actually fell continually relative to developed world incomes.
Among the one-off factors spurring fast growth in the 2000s were China’s entry to the World Trade Organisation in 2001 and its powerful impact on commodity-exporting EMs, the opening up since the 1990s of economies from Latin America to the former Soviet Union, the adoption across much of the emerging world of pro-growth policies including significant improvements in sovereign balance sheets and the rapid spread of technology.
However, Mark Williams, Capital Economics’s chief Asia economist, said: “Economies can only open up once. There are no major emerging economies left to integrate with the world.”
One factor behind the post-crisis slowdown in EM growth has been a turn in the credit cycle, the Capital Economics report argues, with credit growth slowing in many large economies including China and reversing in some. Adding to this are weak demand in developed economies and falling commodity prices.
But Capital Economics’s main concerns are on the supply side of emerging economies: potential growth has slowed, it says. Future growth in EMs will be limited, partly because growth in working age populations in emerging economies will slow more than it will in the developed world. Growth in output per worker is also slowing, as the one-off boosts to productivity growth of the 2000s fade away.
“You can point to policy failures in some places but productivity growth was always going to slow because the rapid growth of the 2000s was unrepeatable,” said Neil Shearing, Capital Economics chief emerging markets economist. “That is unlikely to be offset by a few policy changes on their own.”
Mr Williams cautioned against reading too much into China’s September trade figures on their own but said the slowdown in EM growth was certainly related to and reflected in slower trade growth.
During the 2000s, growth in global trade was typically much faster than global economic growth, he noted, largely because of the impact of rapid globalisation, greater investment growth and the rapid spread of cross-border production lines.
“This has come to an end and may now be going into reverse,” he said. “In the future trade won’t grow faster than output. I suspect that what we are seeing today is the new normal.”
David Lubin and colleagues at Citi made a similar call in a September 30 report describing growth in global trade as having slowed to “stall speed”.
They point to a pick-up in EM activity indicators, notably purchasing managers’ indices, since the second quarter of this year, along with an improvement in EM industrial output - although 80 per cent of this is explained by Brazil and Russia coming out of very deep recessions.
But they argue that this is overshadowed by a collapse in global trade on an unprecedented scale. EM volume export growth has fallen from nearly 10 per cent in 2002-2008 to less than 1 per cent in 2015-16, while growth in global trade volumes was in effect zero in the first half of 2016, they say, citing data from the CPB World Trade Monitor.
“The only two times in the past 20 years when trade volume growth was so weak were both associated with global recessions, in 2009 and 2001,” they say.
