Slowing Economy Gives Way to Global Role Reversals
Thursday, July 17, 2008
The global slowdown stemming in part from the deepening U.S. financial crisis is hitting the world's richest nations the hardest even as emerging nations, some with once-fragile economies, are proving relatively resilient.
Consider, for instance, Britain. A severe housing slump and credit crunch sparked a 63 percent drop in new home mortgages in May compared with May 2007. Mirroring losses in the United States, the average home price in Britain fell to $344,704 in June, down 6.3 percent compared with June 2007, according to the Nationwide Building Society. The stock market in London slipped into bear market territory, joining New York's.
"It affects everybody, and you need not be a home owner, or have credit or be a consumer," said Martin Slaney, head of derivatives at GFT Global Markets in London. "People are getting used to a new terminology; they know all sorts of credit-crunch-related terms. Money can be made now, but generally it's a hugely unfortunate economic time. There's a lot of talk about how bad it is."
Contrast that with oil-fat Russia -- a red-hot emerging market. As in many commodity-driven economies in the developing world, soaring energy revenue has largely insulated Russia, the world's second-largest oil exporter, from the turbulence in global markets. Its gross domestic product is expected to grow 8 percent this year, and consumer spending continues to boom, with a 13 percent increase so far this year, according to Troika Dialog, a Moscow investment house.
"We are overloaded with money, crazy amounts of money from the energy market," said Mikhail Bergen, a professor at Moscow's Higher School of Economics.
It marks a global economic role reversal of sorts. When financial crises hit the Asian markets in the 1990s and Argentina in 2001, the aftershocks spread to other emerging economies, plunging several into recession while wealthy countries went relatively unscathed. Rather than taking its toll largely on residents of developing countries, this economic downturn may cause the greatest damage to those living in the wealthiest countries on earth.
The U.S. economy and financial system are more closely linked to those in other wealthy nations, particularly in Europe, where rising inflation and the weak dollar are adding to growing trouble. The United States and Europe have "similar economies and share the potential problems of industrialized nations in terms of property price fluctuations and financials," said Simon Johnson, chief economist at the International Monetary Fund. "And they find themselves sharing variable degrees of vulnerability."
As global wealth has shifted during the past decade, emerging markets have become not only increasingly stable but they have also been claiming a larger portion of the world's riches than ever before. If Californians are rushing to withdraw money from banks there, the situation in Kenya is just the opposite: People are flocking to banks to open accounts. The Nairobi exchange, which lists mostly Kenyan companies and a handful of multinational firms, posted 10 percent gains in the three months ended in June as local and foreign investors flocked to the initial public offering of the cellphone giant Safaricom.
"I don't think there has been any impact," said Peter Wachira, a manager with AIG Global Investment in Nairobi, referring to the market turmoil. "Where markets in developed countries have been going down, ours has been going up."
That does not mean the emerging world is buffered completely, particularly if both the United States and Europe slip into recession or if the financial crisis in the United States claims more and bigger financial institutions. And without question, sectors of emerging economies are already being stung.
There is growing fear especially in the fastest-growing Indian technology markets, which include outsourcing, back-office operations and call centers. Those sectors are 70 percent dependent on the United States. Several Indian technology companies have slowed their hiring because of the U.S. economy's slowdown. In May, industrial output was up 3.3 percent, half the 6 percent increase in May 2007.
"I will have to lay off more if things don't pick up," said Rajiv Prem, a clothing manufacturer for U.S. retailers, including Anthropologie and Motherworks, who said the drop in orders has meant he had to close two of his three factories outside New Delhi.