An edited version of this article was published in bathimpact newspaper in October 2013.
Perhaps the most important story of the 21st century has been that of the emerging economies. These slumbering giants, home to a majority of the world’s population, awoke to serious capitalist ambition in the recent past; they grew at accelerated rates, reduced poverty sharply and spawned a middle-class that displayed a voracious appetite for consumerism.
When Western economies were diminished by the blows that the 2008 financial crisis dealt them, the anthem of the emerging economies rose to a fever pitch. BRIC (Brazil, Russia, India and China) were anointed the new economic superstars.
Yet in 2013, a decade after the first BRIC report was released by Goldman Sachs, the outlook for these economies is decidedly less optimistic. “If I were to change it, I would just leave the ‘C,’ (for China)” quipped Mr O’Neill of Goldman Sachs last month. “But then, I don’t think it would be much of an acronym.” Goldman Sachs, which used to be the most vocal proponent of the BRIC nations, is now more buoyant about the economic prospects offered by firms with a strong presence in the domestic American economy.
This abrupt reversal in sentiment began with the revival of the American economy earlier this year, when expectations that the US Federal Reserve would put an end to its quantitative easing caused money to migrate from the developing world to the United States.
Yet, the slowdown of the emerging economies has in many ways been inevitable, regardless of the machinations of the Fed: consider the shift to a more sustainable model of economic growth in China, the capricious unpredictability of the Brazilian economy which still has the stubbornly low level of private investment, or the woefully inadequate industrial infrastructure in India.
Perhaps the most influential of these factors is China’s changing economic focus. The Chinese government is no longer chasing double digit growth rates, and it is instead aiming for a structural shift in the economy towards reduced dependence on exports and foreign investment. This has lowered the country’s growth rate to (a still respectable) annual growth rate of 7.5%. The economic deceleration of Asia’s powerhouse has, in turn, had a slackening effect on the other developing Asian economies, which compose a substantial proportion of the emerging markets.
Meanwhile, both India and Brazil have been included in Morgan Stanley’s list of ‘Fragile Five’ emerging economies (also consisting of South Africa, Turkey and Indonesia), so named for their worryingly high current account deficits and rapidly depreciating currencies.
Yet, despite the faltering growth rates across the emerging economics, predictions of a full-fledged emerging markets crisis might be unnecessarily pessimistic. The emerging markets of today are considerably stronger than their twentieth century selves, with markedly less sovereign debt than before, and most of it in local currency. Fidelity’s Nick Price (who controls the $2.9 Billion Fidelity emerging markets’ fund) also points out that the depreciating value of currencies in the emerging world will have the effect of making their exports more competitive, and serve to correct the troubling trade deficits.
The bottom-line is that the emerging market success story might have dimmed quite considerably in the past few months, but there isn’t yet enough evidence for full-fledged panic given how much more contained and resilient today’s emerging world is.
Latest updates:
Are the Fragile Five still under pressure? Financial Times, August 2014
Emerging market growth is on its lowest ebb Financial Times, October 2014
The Eclectic Eccentric 