Emerging economies: The Great Deceleration (The Economist – July 27, 2013)


The emerging-market slowdown is not the beginning of a bust. But it is a turning-point for the world economy

WHEN a champion sprinter falls short of his best speeds, it takes a while to determine whether he is temporarily on poor form or has permanently lost his edge. The same is true with emerging markets, the world economy’s 21st-century sprinters. After a decade of surging growth, in which they led a global boom and then helped pull the world economy forwards in the face of the financial crisis, the emerging giants have slowed sharply.

China will be lucky if it manages to hit its official target of 7.5% growth in 2013, a far cry from the double-digit rates that the country had come to expect in the 2000s. Growth in India (around 5%), Brazil and Russia (around 2.5%) is barely half what it was at the height of the boom. Collectively, emerging markets may (just) match last year’s pace of 5%. That sounds fast compared with the sluggish rich world, but it is the slowest emerging-economy expansion in a decade, barring 2009 when the rich world slumped.

This marks the end of the dramatic first phase of the emerging-market era, which saw such economies jump from 38% of world output to 50% (measured at purchasing-power parity, or PPP) over the past decade. Over the next ten years emerging economies will still rise, but more gradually. The immediate effect of this deceleration should be manageable. But the longer-term impact on the world economy will be profound.

In the past, periods of emerging-market boom have tended to be followed by busts (which helps explain why so few poor countries have become rich ones). A determined pessimist can find reasons to fret today, pointing in particular to the risks of an even more drastic deceleration in China or of a sudden global monetary tightening. But this time a broad emerging-market bust looks unlikely.

China is in the midst of a precarious shift from investment-led growth to a more balanced, consumption-based model. Its investment surge has prompted plenty of bad debt. But the central government has the fiscal strength both to absorb losses and to stimulate the economy if necessary. That is a luxury few emerging economies have ever had. It makes disaster much less likely. And with rich-world economies still feeble, there is little chance that monetary conditions will suddenly tighten. Even if they did, most emerging economies have better defences than ever before, with flexible exchange rates, large stashes of foreign-exchange reserves and relatively less debt (much of it in domestic currency).

That’s the good news. The bad news is that the days of record-breaking speed are over. China’s turbocharged investment and export model has run out of puff.

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