Will the Great Depression spread from America?
"Decoupling" is the source of much controversy. Economists debate whether emerging economies will follow in the footsteps of the United States and fall into recession. The most pessimistic view is that as the economy becomes closer through trade and finance, it will make the business cycle more synchronous, not less. The decline of emerging stock markets led by Wall Street seems to support their view. However, recent data show that decoupling is not a myth. In fact, it may save the world economy.
Decoupling is a controversial topic at present. Economists are debating whether emerging economies will follow the footsteps of the United States into recession. Among them, the most pessimistic view is that with the closer integration of economies through trade and finance, the cycle of global economic fluctuations will become more synchronized. Emerging stock markets' sharp decline following Wall Street seems to confirm this view. However, recent data show that decoupling is not groundless. In fact, this process is expected to save the world economy in the future.
Decoupling does not mean that the recession in the United States has no impact on developing countries. That would be foolish. The key point is that their GDP growth rate will be much less than that in the previous US recession. Most countries enjoyed strong growth in the fourth quarter of last year, and some countries even accelerated their growth, although the US economy almost stagnated and non-oil imports declined.
It is completely nonsense to say that decoupling means that the depression in the United States will not make developing countries suffer from fish in the pool. The key point is that the GDP growth of these countries will be much less affected than before. Most of them grew strongly in the fourth quarter of last year, and some even accelerated their growth, although at the same time, the US economy was almost completely stagnant, and imports except crude oil fell across the board.
One reason is that while exports to the United States declined, exports to other emerging economies rose sharply (see chart 1). As of this year 1 month, China's export growth to the United States slowed down to only 5% (in US dollars), but its exports to Brazil, India and Russia increased by more than 60%, and its exports to oil-exporting countries increased by 45%. Today, half of China's exports go to other emerging economies. Similarly, South Korea's exports to the United States fell by 20% in February this year, but its total exports increased by 20% due to trade with other developing countries.
One of the reasons is that while the pace of exports to the United States has slowed down, the exports of these countries to other emerging economies have advanced by leaps and bounds. This year 1 month, China's exports to the United States only increased by 5% (in US dollars), but its exports to Brazil, India and Russia increased by more than 60%, and its exports to oil-exporting countries increased by 45%. Exports to other emerging economies now account for half of China's total exports. Similarly, South Korea's exports to the United States decreased by 20% from January to February this year, but its total exports increased by 20%, thanks to trade with other developing countries.
The second supporting factor is that domestic consumption and investment in many emerging markets accelerated in 2007. Their consumption expenditure has increased almost three times as fast as that of developed countries. Investment seems to be holding up better: according to HSBC, the real capital expenditure of emerging economies soared by 17% last year, compared with only 1.2% in rich economies.
The second factor is that domestic consumption and investment in many emerging markets accelerated in 2007. The growth rate of consumption expenditure in these countries is almost three times that of developed countries, and their performance in investment is even more outstanding: according to the statistics of HSBC, the growth rate of real capital expenditure in emerging economies reached an astonishing 17% last year, while that in developed countries was only 1.2%.
Sceptics believe that most of these investments, especially in China, are in the export sector, and therefore will collapse as sales to the United States decrease. But less than 15% of China's investment is related to exports. More than half invested in infrastructure and real estate. It is not only China that is building power plants, roads and railways; A large part of the dollars in the Gulf region are also spent on shiny skyscrapers and new airports. Mexico, Brazil and Russia have also launched large-scale infrastructure projects that will take several years to complete.
Sceptics will claim that most of these investments, especially those from China, are concentrated in the export sector, and the results will disappear with the decline of exports to the United States. But in fact, less than 15% of China's investment is related to exports. More than half of the funds are invested in infrastructure and real estate. It is not only China that is building power stations, roads and railways; A large part of the petrodollars in the Gulf countries have also become glamorous skyscrapers and brand-new airports. Mexico, Brazil and Russia have also launched large-scale infrastructure projects in recent years.
Last year, the four largest emerging economies, which accounted for two-fifths of the global GDP growth, were the least dependent on the United States: exports to the United States accounted for only 8% of China's GDP, 4% of Indian GDP, 3% of Brazilian GDP and 0% of Russian GDP. In the year ending in the fourth quarter, more than 95% of the growth of China 1 1.2% came from domestic demand. It is widely expected that China's economic growth will slow down this year, but it will still reach a high growth rate of 9- 10%.
The four emerging economies contributed two-fifths of the global GDP growth last year, and their dependence on the United States was the lowest: exports to the United States accounted for only 8% of China's GDP, 3% of Indian GDP, 3% of Brazilian GDP and 1% of Russian GDP. China's growth of 1 1.2% from last year to the fourth quarter was more than 95% from domestic demand. It is generally expected that the growth momentum of China will slow down this year, but it can still reach an active 9- 10%.
The economic recession in the United States often leads to a sharp drop in the prices of oil and other raw materials, but this time, the surging demand in China has supported the prices and promoted the prosperity of Brazil, the Russian Federation and the Middle East. As of February this year, Brazil's exports jumped 26%. Conversely, if prices remain firm, China's exports to commodity-producing countries will remain firm. The sharp economic slowdown in China has hurt them more than the recession in the United States.
The economic recession in the United States once led to low prices of crude oil and other raw materials, but now the fast-growing demand in China is pushing up oil prices, contributing to the economic prosperity of Brazil, Russia and the Middle East. From January to February this year, Brazil's exports soared by 26%. Therefore, if the price of raw materials remains high, China's strong export momentum to raw material producing countries will be maintained. For these countries, compared with the depression in the United States, the sudden braking of China's economy is more serious.
The popular view is that in a globalized world, business cycles should become more synchronized, which is based on an outdated impression that poor countries mainly export to rich countries. On the contrary, trade between emerging economies has grown faster and now accounts for more than half of their total exports. As a group, emerging markets are now more open to China than to the United States (see chart 2).
Many people think that the cyclical fluctuations in the globalized world will tend to be synchronized, which is actually based on an outdated impression that the exports of poor countries mainly flow to rich countries. In fact, trade between emerging economies has grown even faster, and now it has reached more than half of its total exports. If we regard emerging markets as a whole, its exports to China have surpassed those to the United States.
Some people think that this mainly reflects the intermediate products imported to China for assembly; The finished products are then exported to the United States, so they will be affected by the slowdown in growth. This makes sense, although Asian exports to China are increasingly driven by domestic demand in China.
Some people will argue that this is mainly because China imports intermediate products for assembly, and the final products will still be sold to the United States, which will be dragged down by the sluggish market. This is true to some extent, but Asian exports to China are increasingly driven by domestic demand in China.
Another reason why globalization and decoupling can coexist is that the open economy not only promotes the trade of poor countries, but also stimulates their productivity growth, thus increasing domestic income and expenditure.
Another reason why globalization and decoupling can go hand in hand is that economic opening not only prospers the trade of poor countries, but also urges them to improve their labor productivity, so national income and consumption will also rise.
If commodity prices collapse, if the severe recession in the United States leads to a sharp decline in the stock market, which will hit global consumers and business confidence, it will still have a bad impact on developing countries. The sharp drop in the dollar may also further squeeze the exports of emerging economies.
Of course, if the severe recession in the United States leads to a sharp drop in raw material prices, or drives the stock market to plunge further, which will undermine the confidence of consumers and investors around the world, developing countries will certainly suffer heavy losses. The accelerated depreciation of the dollar will also lead to further contraction of exports from emerging economies.
But perhaps for the first time in history, developing countries will be able to make full use of monetary and fiscal policies to cushion their economies. In the past, when they were net foreign borrowers, capital inflows often dried up during the global recession because foreign investors avoided risky assets. This forced the government to raise interest rates and tighten fiscal policy. Economies with large external deficits are still fragile, but most emerging economies now have current account surpluses and large foreign exchange reserves; Many countries have budget surpluses or are close to balance, leaving ample room for fiscal stimulus when necessary.
However, developing countries will be able to make full use of monetary and fiscal policies to protect their economies, which may be unprecedented. In the past, they were net debtors. When the global economic recession came, foreign investors' avoidance of risky assets would dry up their sources of funds, forcing their governments to raise interest rates and implement tight fiscal policies. At present, those economies with high external deficits are still fragile in this respect, but most emerging economies currently have current account surpluses and huge foreign exchange reserves; Many of them still have budget surpluses, or at least their income and expenditure are basically balanced, which leaves enough room for fiscal incentive policies when necessary.
Perhaps the best support for decoupling comes from the United States itself. Big companies such as Coca-Cola, IBM and DuPont made better-than-expected profits in the fourth quarter, as strong sales growth in emerging markets offset the sharp slowdown in China. Some American companies are surpassing their own economies. With luck, the world economy can surpass the United States.
Perhaps the best example of supporting the decoupling process comes from the United States. Big companies such as Coca-Cola, IBM and DuPont made better-than-expected profits in the fourth quarter, and made up for the weakness of the local market with good sales momentum in emerging markets. One part of the American economy is already ahead of other parts. If all goes well, the world economy will also be ahead of the American economy.