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Emerging economies have been badly affected by the collapse of exports to developed economies.
On this front, we do not expect recoveries, since domestic demand growth will remain
weak for a long time in large parts of the OECD due to the need for balance sheet restoration.
Household savings
rates relatively high
in China
Conditions for domestic demand growth are not so bad in economies that do not face big
debt loads in the private or public sectors. Private sector investment is likely to slow since
capacity utilisation shrinks in the cyclical downturn. To some extent, this will be offset by
fiscal stimulus. Household savings rates are relatively high, particularly in China, so consumer
demand might be easier to stimulate than in many western economies.
Emerging economies are also in a catch-up phase, with strong productivity growth leading
to rapid increases in real incomes. If we can no longer rely on US consumers, maybe we
can hope that households in emerging economies will start filling the gap. Actually, car
sales in China are currently higher than in the US. At the moment, this is not enough to offset
major declines in car sales in western economies. In a few years, however, there is likely
to be a major rebalancing of roles. China will become less driven by exports and more
driven by domestic demand, and the opposite will be true for the US economy.
China: much smaller than the US but added more to world GDP in 2007 and 2008
Source: Reuters Ecowin
In 2009 and 2010, we expect China to rebound but not to the high pace of growth seen in
2007. China is still small relative to the US, but it adds a lot to global GDP. It is particularly
important as an importer of commodities, so we should look for commodity exporters to
benefit most from a recovery in China.
Emerging economies
will contribute to a
pick-up in world
trade
Other emerging economies will also contribute to a pick-up in world trade. Due to the financial
problems, Eastern Europe and Russia are likely to recover more slowly than developing
Asia or Latin America. Western Europe’s neighbours contributed significantly to the
export boom in recent years and to the sharp, ongoing downturn in exports. Until financial
problems are sorted out in Eastern Europe, exports to the region are unlikely to rebound. As
a consequence, Western Europe is likely to benefit less from a recovery in the emerging
economies recovery than the US.
So who will pull the world economy? In the short term, governments will do the heavy
pulling together with the central banks. However, the room for fiscal stimulus will run out
in many countries, implying that monetary stimulus will be needed for a considerable period
of time. Countries that do not suffer from high debt burdens are likely to recover
quickly. This will help exporters in economies with weak finances and lead to a necessary
rebalancing of the drivers for global growth.
Jan Häggström, +46 7 011 097, jaha05@handelsbanken.se
6 April 28, 2009