Emerging markets leading world growth

We hardly hear nowadays about the acronym that became famous early in this millennium called BRIC, which stood for Brazil, Russia, India and China, that was proposed by an economist of Goldman Sachs named Jim O’Neil. Brazil and Russia have fallen by the wayside on the way to high growth because of fiscal mismanagement, their respective governments having overborrowed. But don’t count out emerging markets in general. After all, Mr. O’Neil had an addendum to BRIC, a list that included the so-called Next Eleven. Among these eleven emerging markets that will lead the world in economic growth in the next decade or so are three Southeast Asian countries belonging to the ASEAN Economic Community (AEC): Vietnam, Indonesia and the Philippines — constituting another increasingly popular acronym, VIP. These three emerging markets in Asia, together with China and India are expected to register GDP growth two to three times faster than the world average. They will be the star economies in the so-called Asian Century that has replaced the American Century.

As reported by the IMF in its April 2017 World Economic Outlook (WEO), global growth is forecasted to be 3.5%, an upgrade from the last forecast 3.4% (January 2017) on the back of a stronger outlook for the US, China, Japan and the euro-area. As analyzed by Jim Walker in Asianomics, these recent forecasts highlight the growing role of emerging markets in the world economy. The contribution of advanced economies to global growth has declined steadily since the late 1970s while that of emerging markets has increased. During the period 2010-2015 emerging market economies on average accounted for 70% of growth in global output and consumption, a three-fold increase in their contribution compared with the late 1970s. What is worth noting is that all the pump priming by advanced country central bankers has not been able to offset, even temporarily, the depressive impact of depopulation and ageing. The harsh reality is that emerging markets are in general capitalizing on their young and growing population while the developed countries, including those in Asia, are suffering from very low fertility rates.

These recent IMF-reported fig- ures also justify the so-called rebalancing strategy of the Duterte Administration that is giving less emphasis to the advanced countries and greater attention to our economic relations with China and the other emerging markets in the Asian region. Especially interesting and pertinent to Asian countries is the increasing importance of China’s domestic absorption from 2000 onwards in accounting for growth in other emerging markets. The combined demand from China and other emerging markets accounts for more than 80% of the contribution of external demand to GDP per capita growth in other emerging markets, up from 36% in the late 1990s. As late as 1995, China consumed only 3% of rest of Asia’s non-domestic global value-added production but the measure has since increased rapidly and stood at 14% in 2011.

Asian exports to China have been rebounding since early 2016. As analyst Jim Walker opines, this is not a temporary upswing driven exclusively by macroeconomic policy easing in China. It is highly probable that China had its hard landing in 2014/2015 and has now started a new cyclical, multi-year upturn based on domestic consumption. China, after all, can now count on some 500 million of their population who have attained middle-income status and have begun to respond to their government’s mandate for them to shift from being high savers to being bigger spenders. The spending of these half billion Chinese consumers bodes well for resilience of the regional export upswing and for overall Asian growth. One clear evidence of this new image of the Chinese as a big spender is the way our tourist destinations like Boracay are attracting big crowds of Chinese tourists. We have to capitalize on this new cycle by focusing on more high-value agribusiness products like bananas and pineapples that we can export to China. We also have to resolve some of our inner conflicts concerning mineral resources so that we can ride on the next wave of increased demand for commodities imports of China to feed their manufacturing sector increasingly geared, no longer to export markets, but to domestic consumption.

Those watching closely financial markets globally should also consider the possibility that the continuing confusion in economic policies in the United States under the leadership of President Donald Trump may actually reverse the trend of an appreciating US dollar. There are already signs that capital is beginning to flow away from the US towards selected emerging markets. Asianomics recommends an overweight position on Chinese, Korean, Taiwanese, Hong Kong, Philippine, Thai and Vietnamese equities. If indeed the US goes through a mild recession in the next 12 to 18 months, it is not impossible to expect the Philippine stock market heading back towards the 8000 level and for the exchange rate to settle at below R50 to $1 by the end of the year.

For comments, my email address is bernardo.villegas@uap.asia.