The good news is that global growth will accelerate in 2014, and the world economy will finally shrug off its two-year doldrums. The irony is that the new locomotives of growth will be the advanced economies –“the dull and the old” – including the United States, the United Kingdom, Germany and Japan. Despite the hype of recent years, average growth in the emerging markets has fallen from 7.4% in 2010 to 4.7% in 2013, and will continue to disappoint in 2014. According to IHS estimates, in the coming year emerging markets will contribute the least to global growth since 2010, while advanced economies will see the strongest growth in four years.
The keys to understanding the growth slump in the advanced economies – and the nascent rebound – are the twin headwinds of private-sector deleveraging and public-sector austerity. They have substantially cut growth rates in the US and European economies since 2010. The sluggish growth of the past few years is typical of the “long adjustment” experienced after a financial crisis. History is rife with examples of such long adjustments. For example, in the early 1990s, Sweden and Finland suffered three- and four-year recessions, respectively, after their banking crises.
Fortunately, these twin headwinds are now easing, since substantial progress has been made in reducing both public- and private-sector debt, especially in the United States. American households and banks have aggressively reduced debt levels, while the US public-sector debt has been stabilized, albeit in an unnecessarily fractious and politically divisive way. Europe has also made progress on fiscal austerity, but private-sector leverage – especially in the banking sector – remains at troublingly high levels.
Recently, some economists have raised the spectre of “secular stagnation,” a scenario in which there is persistently too much saving and too little investment and,, with interest rates at or close to zero, little scope for central banks to do much. Arguably, this scenario describes Japan’s economy until a year ago, when the government of Shinzo Abe began a series of aggressive stimulative policies. Perhaps a mild form of secular stagnation is also afflicting parts of Europe, especially in the south. Nevertheless, the notion of secular stagnation is belied by US data. Many of the trends that have worried analysts and policy-makers in recent years – low rates of household formation, depressed birth rates, low levels of capital spending relative to GDP and large numbers of long-term unemployed workers – have recovered, and are on track to reach pre-recession levels in the next couple of years. In the end, the US economy is best described as having suffered through a “long adjustment”, which is likely ending, rather than “secular stagnation.” The same can probably be said of Europe, although the process of adjustment is not quite as far along.
The prognosis for growth in the emerging world is not as upbeat. After having enjoyed a boom for a decade in the 2000s, there has been an alarming deceleration in the past four years. This has little to do with the “taper panic” that gripped financial markets in the spring and the summer of 2013 and triggered a massive outflow of capital from many of these economies. To be sure, the finances of some of the key emerging markets are fragile – Brazil, India, Indonesia, South Africa and Turkey. But the far bigger challenges facing these economies and others, such as China and Russia, are structural.
The “BRICS party” of the 2000s was fueled by three global drivers: a credit boom, a commodities “super-cycle” (propelled in large part by China’s double-digit growth rates), and “hyper-globalization” (as multinational corporations expanded global supply chains). All three of these drivers have lost their steam, leaving many emerging markets high and dry. Meanwhile, most of these economies enjoyed the boom without putting in place the structural reforms that would have improved their productivity, raised their competitiveness and guaranteed strong long-term trend (potential growth). In fact, potential GDP in the emerging economies is growing at barely half the rate now that it was in the mid-2000s. Without major microeconomic reforms capable of opening up labour and product markets, reducing fiscal burdens and lowering unit labor costs via productivity gains, a return to the “BRICS party” of the 2000s is unlikely.
All this means that the world growth and competitiveness landscape is (once again) changing. Emerging markets will no longer be the primary locomotives of the global economy – advanced economies will (once again) contribute on a more equal basis. At the same time, rising labour costs in the emerging world, stagnant wages in the developed world and low energy costs in North America will see a re-balancing of global investment flows back toward the “dull and old” economies.
Author: Nariman Behravesh is Chief Economist at the IHS and is participating at the World Economic Forum’s Annual Meeting 2014 in Davos.