The slowdown in emerging countries’ growth
We would argue that another global recession is a possibility, because – as previously mentioned – the global economy is being hit simultaneously by a number of events.
Since early 2010, in particular, there has been a marked slowdown of growth in large emerging countries, mainly due to these countries’ problematic growth models. For instance:
- There has been a loss of competitiveness and profitability in China, due to sharp wage increases since 2010;
- India has seen a stagnation in its industrial production capacity, partly due to hiring difficulties but also issues to do with its education and labour mobility;
- Brazil’s exchange rate still has a lasting overvaluation despite the recent depreciation, which has not gone far enough;
- And there is also the dominating concern that any of the crises could spread to open economies (such as Singapore, Taiwan, South Korea, Sweden and Central European countries) via global trade.
All things considered, the fact that practically all regions are affected means there is a serious threat for global growth.
Fundamentally, we believe the problems are down to:
- OECD countries continuing to deleverage in public and private sectors;
- China halting a growth model that was driven by low-end production, exports and migration;
- the delayed growth in Brazil’s and India’s industry.
Faced with this risk of recession, does the world have the capacity to react with its economic policies?
In OECD countries, there is no longer any room for manoeuvre in monetary policies. This is because interest rates are already very low, and liquidity is already extremely abundant. These countries cannot necessarily implement further fiscal policies because of very high fiscal deficits and public debts. Of course, other options are conceivable, such as quantitative easing in the United States, further VLTROs or asset purchase policies in the eurozone, another extension to the Gilt purchase programme in the United Kingdom, and the creation of liquidity in Japan. But there is a possibility these expansionary monetary policies would have very little effect on the economy.
In emerging countries, interest rates can be lowered. And as the debt ratio is much lower than in OECD countries, in addition to lower fiscal deficits and public debts, monetary policy ought to be more efficient.
The issue is therefore not whether emerging countries are able to conduct more expansionary economic policies, but whether these policies could restore global growth:
(a) If emerging countries have structural economic problems, counter-cyclical policies will not resolve them. Boosting credit and investment in construction by state-owned companies in China would improve neither the sophistication of the product range nor cost-competitiveness. Running fiscal deficits or lowering interest rates in India would not resolve their issues in the education sector. Likewise in Brazil, it would not be able to fix its overvaluation, nor the fall in investment and employment in its industry.
(b) If additional expansionary monetary policies in emerging countries lead to a depreciation of their currencies – which we can see happening now – the situation would improve in emerging countries but deteriorate in OECD countries. Viewed as a whole, there would be no improvement in the situation of the global economy. It is striking to see that even the Chinese RMB has depreciated against the dollar; the Brazilian real and the Indian rupee have depreciated sharply since 2011.
Global growth in 2012-2013 should cause more concern
Current forecasts continue to point to a recovery in global growth between 2012 and 2013 and then in 2014. But we believe there is cause to be more concerned. The reasons for such an outlook lie in the slowdown in growth that affects all regions and has structural causes. Also, OECD countries no longer have the room for manoeuvre to conduct counter-cyclical economic policies. And although emerging countries still have the room to manoeuvre and conduct such policies, the fact remains they could still prove ineffective, regardless.