The shifting trends in global economy

Wed, 14 Aug Pre-Open

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The global economic climate has changed for the worse since the financial crisis in 2008. While the growth in the global economy has slowed down since, something else too seems to have changed. We are talking about the balance between developed and emerged economies. The latter were the first and fastest to recover from the crisis. There was a time when BRICs (Brazil, India, China, and Russia) used to find huge favour with investors. However, under the current scenario, the investors' sentiments seem bearish for emerging nations.

As per an article in the Wall Street Journal, while the key emerging economies still surpass the growth in the developed, the momentum has slowed down. Infact, as per estimates of Bridgewater Associates LP , a well known investment firm, the developed nations are contributing more to the growth in the global economy than emerging nations.

So what is driving this change? Among the many factors, there is the growth in Japan - a key developed economy that after years of deflation is in an expansion mode now. The US economy also seems to be recovering and things are not as bad for the European economy as they were in the past. In contrast, the leading emerging economies like China and India are slowing down. What is worse is that the slowdown in demand of commodity in China is causing a ripple effect. With this, major economies in Latin America and South East Asia have also been caught in the slowdown. The Indian economy too seems to have reached an impasse with plunging currency and widening current account deficit. It can neither afford inflation nor risk the growth prospects for hiking interest rates.

But the key question here is - what happened to economic coupling? If the developed economies are expanding, shouldn't that be benefitting emerging nations too? Well, unfortunately, that does not seem to be the case. The reason can best be explained by the nature of recovery in the developed nations. To understand it better, let us take a look at what is happening in the key developed nations. In Japan, it is the influx of cheap money that is boosting the economy. Whether it can be sustained or not is a different issue altogether. But a key aspect of this recovery is the weakness in the Yen. The same has made the imports costlier and has dashed hopes for emerging nations for whom exports are a major source of revenue and growth. Again, recovery in the US is not demand based. The economy is mainly gaining from the energy boom and demand for US made equipments. The labour wages have hardly improved. In short, the recovery is irrespective of the consumer demand and is unlikely to rub on to the emerging nations that are mainly reliant on global trade.

This development will have a significant impact on the movement of capital across the globe. Also, it will be a key concern for companies that have built strategies and capacities keeping the growth prospects of emerging nations in mind. That said, it is too soon to say if this is an aberration or the onset of a long term trend.