Except for the pandemic and post-pandemic years, since 2002, the contribution of emerging countries to world growth, particularly in the Asia-Pacific region, has been increasingly important in explaining the world economy.
This trend showed particular momentum after the global financial crisis and, although it originated in developed countries, greatly influenced the development of emerging countries. In this context, China adopted aggressive stimulus measures to offset the impact of the global crisis on its economy, and by generating strong demand for basic products, this benefited many emerging countries exporting raw materials. According to IMF data, the growth gap between emerging and developed countries reached 6.2 points in 2009. Later, the gap normalised, but in the years before the Covid crisis it was still quite positive (between 2 and 3 points) if it were not for a mix of structural and cyclical factors that hindered growth in some emerging countries. Used to slow down.
However, the growth gap between developed and emerging countries fell substantially between 2021 and 2022, averaging just 1.3 points, the lowest since 1999. Thus, in these last two years, it can be said that the world has returned to Locomotive United. The states, among other things, because of the significant fiscal tax held by Washington. Now, in the face of rising inflation, the US Federal Reserve and ECB are looking at faster and stronger increases in interest rates to slow economic growth. In 2023, very weak growth can be expected in the main advanced economies. The question, therefore, is whether the world economy can find a new locomotive, or at least repair the old one, i.e. whether we will see emerging countries pulling the world economy again, with western economies catching up with their growth. Will increase the difference.
And the answer is yes, we can expect improved relative performance in 2023 for many emerging countries, with Asia Pacific leading the way, recovering positive growth differentials not seen since 2017. The justification is for two reasons.
Firstly, due to the break in the previous months of the dollar’s appreciation in 2022 against most currencies. Many emerging countries have dollar-denominated debt and when the value of their local currency depreciates in relation to the dollar, the real value of their external debt increases locally, constraining their ability to pay and increasing their external debt. Perceptions of financing problems increase and result with less foreign investment. But now, with the Fed announcing a perhaps permanent break in its monetary tightening cycle, emerging countries will find it easier to manage policy, they won’t be forced to raise interest rates, and investments will be cheaper to finance.
Second, the reopening and reform of the Chinese economy is important in itself. And that is, if in the past it was said that “when the United States sneezes, emerging countries catch a cold”, at present the growth of many emerging countries is more linked to the fate of China’s economy. United States.
Reopening the Asian Giant
It may seem a bit paradoxical or daring to bet on more recovery of the Asian giant in the coming months when this week we have received activity data for the month of April which clearly shows that its activity is losing momentum. But a deeper analysis of these figures gives us enough reason to be confident.
Of the April activity, perhaps most disappointing was the data on industrial production, which recorded a year-on-year growth of 5.6%, which would correspond to a contraction of 0.5% in month-on-month terms. But the decline in production reflects not so much underlying weakness as it is largely the result of a desire to reduce excessive inventories.
For its part, the retail sales indicator, which rose an overall 0.5% month-on-month, showed a divergence between much weaker spending on goods and faster spending on services that shows no signs of moderation. So this is a different growth from the past, in which there has been a huge increase in the consumption of services. Thus, during the five holidays in early May of the “task force”, tourism spending exceeded 2019 levels for the first time.
In other words, the rebound in activity in China is now being driven by private spending on services, unlike in the past when it was driven by public investment in infrastructure. This implies a marked difference in the behavior of the economy which might lead us to believe that growth is not picking up. In the case of a planned economy like China, focused public drives on infrastructure investment had a much quicker and stronger impact on activity. In contrast, the consumption-led rebound will now be more gradual but self-sustaining, even as it gradually gains momentum throughout the year.
In China, unlike the case in the United States, the excess savings accumulated by households during the pandemic are highly concentrated in high-income households. The jump in spending on services is explained by the fact that these households can finally spend whatever they want on leisure and entertainment activities and tourism. But this very specific spending, by supporting job creation in service sectors, will gradually improve other households’ incomes and filter through to a more general improvement in spending.
Thus, there is still scope for consumption to continue improving in the coming months and come back with job creation. Additionally, given the vast expansion of university education over the last two decades, the system is producing many people because they have university degrees, a mismatch between expectations and reality, because many of the jobs that the economy is creating They are still manual. If working conditions for young people do not improve and do not match their expectations, the authorities will hardly resist the temptation to resort to their old manuals of incentives to work in the past, which are limited to infrastructure. increasing expenditure.
Due to all of the above, the growth of the Chinese economy in 2023 should be closer to the 5.5%-6% range than the official target of 5%, and this should also have carry-over effects for the region and the global economy. clearly visible in the second half of the year.