Emerging markets: Levers for global growth

One of the questions recently debated is the role that emerging markets can play in helping developed countries through this soft patch.

The composition and dynamic of the world has changed dramatically over the past decade. Emerging markets are growing much faster than developed economies.

In June, the IMF predicted that the global economy would grow by 4.3 per cent in 2011 and 4.5 per cent in 2012, with emerging economies expanding by 6.6 per cent and 6.4 per cent, roughly three times the 2.2 per cent and 2.6 per cent for the developed world.

There are big differences in the growth rates and stages of development among developing economies. Some emerging economies, in the past five years or so, have had a very real effect on the global economy. China in particular, through its massive surplus, has helped fund the trade deficit in the developed world, especially the US.

But there are significant opportunities in emerging markets beyond the Brics – countries like Indonesia and Turkey are starting to make their presence felt on the global stage, while other large economies such as South Africa and Mexico have pockets of strength but are not yet performing at optimum levels. We also need to consider the big potential of many frontier markets such as Nigeria and Egypt.

Emerging economies derive a greater percentage of GDP from investment than developed markets, while consumption is a smaller component of their GDP. Essentially, this is a consequence of an export-led growth model, supported by strong demographics and lower wages.

Looking at the composition of equity indices, consumer sectors are smaller in developing nations, whereas areas such as financials, telecoms and materials are larger. Additionally, export-led growth becomes more balanced with internal growth. This is also now occurring on a regional basis, particularly in Asia, where trade in countries such as India, Taiwan and Malaysia are growing faster with each other than developed economies.

In other words, these countries are less dependent on developed economies than in the past. China still trades more with developed countries, highlighting, once again, how important it is for global growth.

The internationalisation of the renminbi is a sign of China’s importance on the global stage and is likely to become a sought after currency, especially given the debt problems and growth issues in Europe and the US. The renminbi is on an appreciation path, albeit in a slow and controlled manor, which should help towards restoring some global economic imbalances.

China is in the middle of this transition phase from exporter to a more balanced economy but, such is its growing influence internationally, it will still be one of the most powerful forces behind helping the global economy through this difficult patch.