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Analysts’ prediction that 2014 would be a bad year for emerging markets didn’t play out. The numbers show that developing-country stock markets performed better than those in the advanced economies
Remember how this time last year a lot of analysts were predicting that 2014 would be a bad year for emerging markets? Didn’t really happen, did it? Now I hear economists saying the reckoning they’d expected has only been postponed. It’ll happen next year instead. It’s possible, but I wouldn’t bet on it.
In this discussion, one crucial fact is both obvious and usually forgotten: the so-called emerging markets are all quite different. They don’t move in unison. Take the impact of cheaper oil. Just as in the advanced economies, it’s good news for some (the equivalent of a tax cut) and bad news for others (the equivalent of a cut in income). It’s unhelpful to generalise. Many of the world’s star performers in 2014 were emerging-market economies. The same will be true in 2015.
The fallacy of agglomeration is compounded by a failure to grasp relative scales. Taken together, the two errors give a distorted picture of global activity.
The slowing of China’s expansion is a constant theme these days. Yes, but remember that China will be a $10-trillion economy by the end of 2014; that during the course of this year’s slowdown, it added roughly $1 trillion to world output; and that slowing growth in China is still quite rapid by most countries’ standards. Adjusted for purchasing power, China’s economy is now about as big as the US: growing at the supposedly disappointing rate of 7.0 to 7.5 per cent, it’s adding more than twice as much to global output as the US.
Yet the median financial commentator is excited about the US and downbeat about China. What am I missing?
In current-dollar terms, China’s economy is now twice the size of Japan’s. Again, investors seem more energised by the smaller case. Japan would have to grow at a rate in excess of 10 per cent to make a bigger contribution to global output than China. Or look at Europe. China is bigger than Germany, France and Italy combined: the biggest euro economies would need to grow by more than seven per cent to rival its addition to global activity. In other words, a sense of proportion would be good.
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