The tail is wagging the dog. Over the past week the stockmarkets of the developed world have fallen by around 5 per cent, despite the further evidence of recovery in the US and UK, and signs of an upturn in Europe. But the reason for the fall has nothing to do with the developed world. Rather it is a growing fear of disruption in the emerging world.
It may seem inherently improbable that a collapse of the Argentine peso and a plunge in the Turkish lira should provoke such a reaction. But there are other less dramatic problems in other emerging nations, and since the emerging world as a whole accounts for 40 per cent of global GDP, what happens there does have a big influence of what happens here.
For the past decade the main driver of the world economy has been the emerging world: the BRICs, the growth markets, the “next 11”, whatever you choose to call them. We talk of the world recession of 2008/9 but there was no overall recession in the emerging world and the two largest economies, China and India, grew throughout that period. As a result, the global economy has changed for ever. China became the world’s second-largest economy, passing Japan, while India became the second-largest investor in the UK.
However the balance of the world economy, tilted so steeply towards the emerging economies, is now tilting back a little. They will still grow faster than we do this year, but the gap as projected by the IMF will be the narrowest since 2001. A bit of reassessing is clearly in order.
The trigger for the sudden shift of mood seems to be the tapering down of the monthly purchases by the Fed of US treasury securities. We will know more about the next stage of this later this week but meanwhile note that the new Fed chair, Janet Yellen, has to achieve something none of her predecessors have had to do: deflate a bubble slowly. But it is odd that a slight tightening of policy in the US should provoke such a negative reaction in the emerging world. Why?
What I suggest the Fed move has triggered is a reassessment, I think a healthy one, of the strengths and weaknesses of the emerging nations. They get lumped together but of course they are very different, the only common features being that they have at the moment a lower GDP per head than the developed countries, and faster growth. Just to take the BRICs, you have China, huge and still racing forward, but with serious structural challenges. You have India, again taking on a bigger place in the world, but going into an election with grave issues of governance and economic management. Russia has its over-dependence on energy and raw material exports, great when the oil price was $130 a barrel, OK at today’s $107, but not-so-great were the price to fall back $80. Brazil has had to adjust from a long boom to mediocre growth – this year it will grow more slowly than we do – and that will lead to social pressures.
The common theme here, and this applies very much to Argentina and Turkey, is that the competence of economic and political management in much of the emerging world still lags behind that of the developed world. While these countries were growing so fast and while we were preoccupied by our own very evident failings we tended to ignore the warning signs. Now we are taking a more balanced view. You get faster growth but you also get greater risks.
Does this mean that globalisation, that great engine of growth over the past 30 years, is slowing down? Probably yes, in that the pace of the shift of power will slow. You can see this slowing in all sorts of ways. One example is that companies in the West are starting to bring back to Europe and North America manufacturing jobs that had been exported to Asia. Another is that the flows of capital from Asia into the West seem to be slowing.
The over-riding lesson, though, is that the rules for the emerging world are not so different from those in the developed world. Economic competence matters. So you are better to try and run sound national finances, have a stable currency, keep inflation under control, bear down on corruption, minimise political interference in corporate decisions, and so on. The huge achievement of much of the emerging world over the past decade is to bring hundreds of millions of poorer people into the new global middle class. It is very much in the self-interest of the West that this should continue – but there are no short cuts along the path.
What the GDP lift really means
Another set of decent GDP numbers, greeted as usual with a bit of crowing from the Coalition and a bit of carping from the Opposition. Some points.
One is that on the official figures the economy will not pass its previous peak until some time later this year. They will be revised up, maybe not for some years, and my guess looking at employment levels, hours worked and consumption patterns, is that actually we will be seen to have passed the previous peak some time last year. (The US is still not up to its previous peak in employment.) But this is still a disappointing recovery. Having gone down fast you would expect us to come up fast – and we haven’t.
The second point is what is happening to living standards. Officially, real wages are still below the rate of inflation but expect that too eventually to be revised. We are over-counting inflation for several reasons. One is that there are concealed taxes in energy prices, for we pay green levies in the form of higher utility prices rather than in general taxation. Another is that the much higher university fees are counted in full, whereas only about half of the loans to fund will ever be repaid. Still another is that a lot of the things we “buy” are actually free: Google searches, free apps and so on. The growth of free is another reminder of the point made by Guy Hands in yesterday’s Independent that GDP is not necessarily a good measure of living standards.
Also, wages may be rising more than the official figures suggest. The reason is that they don’t include, for example, earnings from self-employment or dividends owners may take from their companies. Earnings on these wider measures have been rising at roughly double the published figure. The big point here is that at last we are emerging from the tunnel. Some tunnel.