EMs CLAIM CENTRE STAGE
A new OECD report reconfirms Emerging Markets, including India, as the established engine of global growth. EPISODE # 129
Dear Reader,
A very Happy Monday to you.
Last week the Organisation for Economic Co-operation and Development (OECD), the club for rich countries, released its global economic outlook. The good news is that it found the world economy, battered for the last three years, showing signs of a recovery. All this while Germany just slipped into an official recession.
There was another takeaway though. The OECD growth projections for this year and next showed India topping the charts. Equally significant was the fact that the top five countries, ranked according to growth, are emerging markets.
This week I explore this phenomenon, wherein EMs or emerging markets have established themselves as the global growth centres and the attendant implications. Do read and share your feedback.
A big shoutout to Abhijit, Gautam, Vandana, Premasundaran, and Aashish for your informed responses, kind appreciation and amplification of last week’s column. Once again, grateful for the conversation initiated by all you readers. Gratitude also to all those who responded on Twitter and Linkedin.
Unfortunately, Twitter has shut down amplification of Substack links and content—perils of social media monopolies operating in a walled garden framework. I would be grateful therefore if you could spread the word. Nothing to beat the word of mouth.
Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.
SPOTLIGHT ON EMs
Last week the Organisation for Economic Co-operation and Development (OECD), the club made up of rich countries, released its global economic outlook for the year. It projected a fragile global recovery for the world at 2.7%—the lowest growth in gross domestic product (GDP); and, a moderation in inflation.
In short, the world economy is not out of the woods as yet. It summed up its economic report card thus:
“The global economy is showing signs of improvement but the upturn remains weak, amid significant downside risks.
Lower energy prices are helping to bring down headline inflation and ease strains on household budgets, and the earlier-than-expected reopening of China has provided a boost to global activity.
However, core inflation is proving persistent and the impact of higher interest rates is increasingly being felt across the economy.”
However, there was a very important subtext in the OECD report card for the world. It was a confirmation that emerging markets have emerged as the global growth powerhouses.
The graphic above is self explanatory, yet I will share my thoughts:
Firstly, it shows that India tops the growth tables. According to OECD, not only will India lead the global growth charts this year, but it will do so next year too. Last year it overtook the United Kingdom and emerged as the fifth largest economy in the world.
Second, the top five countries—all of whom are growing above the global average of 2.7%—are emerging markets.
Third, ignore China’s numbers, as we never really know what is going on in that country. The West, till recently, always preferred to take our eastern neighbour at face value. No one is denying its impressive growth trajectory or its size, but its GDP numbers are a different story.
Four, the next three fastest growing economies—Indonesia, Turkey and Saudi Arabia—represent the new regional growth leaders. Saudi Arabia is the bellwether for the Middle East region that is awash with nearly $4 trillion in profits accruing from the elevated prices of crude oil.
Clearly, the onset of the pandemic and the subsequent unravelling of the global economy only accelerated this transition of economic power to EMs.
The Pivot
The chart, based on data sourced from the International Monetary Fund (IMF), captures the new political economy of growth—emerging markets are the new growth centres of the world. The GDP computed on PPP (Purchasing Power Parity), which essentially nets out the inflation differentials between countries, shows that EMs now account for little under two-thirds of global GDP.
This big pivot, as the graph above shows, has been coming for awhile. But the process accelerated in recent years, especially in the aftermath of covid-19 pandemic, which had dodgy origins in Wuhan, China.
The covid-19 pandemic quickly morphed into a global economic crisis. The ongoing Russia-Ukraine only brought forward the geopolitical reset that was underway with the West initiating decoupling with China—leading to disruption in global supply chains. This interplay of three shocks—economic, energy and geopolitical—have roiled the world economy.
They have also caused a spiral in global inflation, not witnessed since the 1960s. In fact, as the OECD points out, inflation still poses downside risks to the fragile global economic recovery.
Resilient EMs
The IMF has an interesting theory on what is inspiring this makeover.
In a paper published in the aftermath of the covid-19 pandemic in its publication, Finance and Development, the IMF observed:
“Past crises demonstrate that emerging market policymakers can overcome adverse shocks and rebuild economic resilience.”
The same paper then added:
“Emerging markets must reclaim their hard-won macroeconomic strength , as they did after the financial crises in the 1990s and early 2000s and the global financial crisis that began in 2008.
With recovery from the pandemic proceeding at divergent speeds, emerging markets must also learn from one another how best to navigate risks and maintain resilience. This affects more than just emerging markets.
With their growing systemic relevance in the global economy, a strong emerging market universe will also drive global stability.”
Check out the short conversation below with the authors of this report:
Money Talks
If you recall, in the post World War-II phase, the United States, called the shots. Why? Because they packed the biggest economic clout, especially when compared to the war torn economies.
Some eight decades later, that clout has weakened—especially with the rise of China. Don’t get me wrong. The US is not weak—far from it. It is just that its writ does not go unchallenged anymore.
Seen this way one comprehends the recent swag of Saudi Arabia—it rebuffed the US, its longest ally, and is openly flaunting its relations with China. Similarly, India and several other countries, have shrugged off the US sponsored sanctions against Russia and continued to purchase their oil—in fact, it has turned into a money spinner with India re-exporting the refined crude to Europe at a higher price.
This is also the reason that countries are beginning to question the pre-eminent status of the US dollar as the global reserve currency. Recent actions of the US Fed has triggered a sharp depreciation in the currencies of most countries, unleashing a fresh inflationary impetus. The volatility and associated costs are triggering a rethink, or at least a conversation about the domination of the US dollar.
Clearly, money talks and the US is reconciling itself to the new global order. It is now focusing its will to bend China—whether it succeeds or not is anyone’s guess. But, the fact of the matter is that the US is still the single largest economy in the world at $27 trillion; even if we were to buy China’s official GDP numbers, the country is a distant second at $14-16 trillion.
Undoubtedly the global polity is fragmenting rapidly. While the EMs are not one entity, individually, countries like China, India and Saudi Arabia, will continue to hold their own in this new world order.
Don’t forget that together, EMs and developing economies, account for more than two-thirds of the global population—a proportion that mirrors its economic clout. If this populace gets its act together, they can, like the IMF argued in its paper, redefine world polity.
Recommended Viewing
Sharing the latest post of Capital Calculus on StratNews Global.
Over the last few weeks, several global investment banks, including Morgan Stanley and Amundi, have put out reports arguing that the decade beginning 2013 was India’s most transformative ever. It has set the stage for India to achieve its inherent potential.
They are not alone. Other investment banks, the two multilateral institutions, World Bank and the International Monetary Fund, have made similar claims recently.
Why is everyone betting on India all of a sudden?
What has changed?
Will this, like in the past, be another instance of India flattering to deceive?
To answer all these questions and more we spoke to the brilliant and erudite Saugata Bhattacharya, Chief Economist Axis Bank. Do watch.
Sharing the link below:
Till we meet again next week, stay safe.
Dear Anil,
Very apt article! As you rightly said, the global economy is going through an economic slowdown following a series of interconnected events like the covid pandemic, Russia s invasion of Ukraine, high inflation, geopolitical tensions and disruption of supply chains.India seems to be doing well in these uncertain times.It is one of the fastest growing economies predicted to expand around 6% while the global economy grows around 2.8%..
Inflation in India is also under control, with the consumer price index expected to be around 5.1%.The RBI understands the complementarity of Monetary policy and financial stability in the long run.Our economy needs to expand faster and for that buisness investments and market opportunities in a stable financial scenario must increase.
On US position of power economically and politically - If we look at it from another angle -
It is human nature to refer any dispute within some members of the world (= countries) to the strongest member of the group (=USA).
Today the world has, generally speaking, a reduced perception of US'S trust quotient.
Anyone who is even, say 20% as strong as US economically, can take the world stage if that country can build its trust quotient.
China is trying to do so, but due to its myopic worldview and the deep-rooted resentment against the west for the opium wars, etc they are building the opposite- distrust.
India is trying to occupy that space in the world stage....if we succeed it can catapult us to a position of significant influence