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The composition of global growth has changed fundamentally, away from emerging markets and in favor of developed economies, according to Nariman Behravesh, chief economist at IHS Inc. (NYSE: IHS), the leading global source of critical information and insight.
Speaking at the IHS Economic and Country Risk conference in Paris, Behravesh spoke of four trends behind the divergent performances of economies and sectors.
“Of the many cross-currents that have buffeted the world economy in recent years, four stand out as having had a major impact on the performance of key economies: debt and deleveraging, the plunge in the price of oil and other commodities, central banks moving in different directions, and a strong dollar,” Behravesh said.
Winners and losers of the ‘Great Divergence’
Not surprisingly, these four trends have had disparate effects within and across countries. “US consumers are among the biggest beneficiaries of the ‘Great Divergence’, thanks to sounder finances, lower interest rates, reduced oil prices and a stronger dollar,” Behravesh said.
Lower oil prices, interest rates that are at (or below) zero and weak currencies are helping both Europe and Japan. However, unlike US consumers, the purchasing power of European and Japanese households has been hurt by weaker currencies. The biggest drag on growth in these economies is high (and in many cases rising) levels of debt. The ratio of total debt-to-Gross Domestic Product (GDP) in Japan and many European economies is well above 250 percent of GDP. Germany, the United Kingdom and a few other Northern European countries are the only exceptions. The need to deal with the debt surge (especially government obligations) will continue to constrain both European and Japanese growth rates over the next decade. The surge in China’s debt is also a source of increasing risk and concern.
Other emerging markets: truly divergent
While emerging market debt is, on average, lower than that of the advanced economies and China, debt levels in some Asian economies (Malaysia, South Korea, Thailand and Vietnam) and in Central Europe (Hungary and Slovakia) have risen at a rapid pace in recent years. This could hurt their growth prospects.
For the moment, debt is less of a problem for economies such as India, Brazil, and Russia. A far more important factor in the divergent performance of these three economies is big drop in commodity prices. As an importer of oil and other raw materials, India is a big beneficiary. At the other extreme, as commodity exporters, Brazil and Russia (as well as other countries in Latin America, Central Asia, the Middle East, and Africa) are seeing much weaker growth or recessions.