Downturn Starts to Hit Emerging Economies
Saturday, September 13, 2008
Developing countries including China and India, where red-hot growth has lifted hundreds of millions of people out of poverty in recent years, are showing signs of economic cooling as the effects of the downturn that started in the United States continue to spread around the globe.
Fears that booming emerging markets are becoming caught up in a global slowdown helped send the dollar soaring this week. Investors continue to flee juggernauts such as Russia into safer dollar-denominated investments. The shift comes as the prices for commodities from developing countries, particularly oil, drop precipitously.
For many of these countries, a modest slowdown may actually be good news. Some had been growing unsustainably fast, raising the specter of inflation and threatening long-term prosperity. Yet the slowdown is also confronting the largest emerging nations with a key test. After years of breakneck growth, they must recalibrate their economic policies to avoid steeper downturns that could stymie job creation, hinder efforts to reduce poverty and lead to political instability.
"Basically, what you've got is the emerging world now slowing at the same time as the developed world," said Michael Hartnett, chief emerging markets strategist for Merrill Lynch. "Though the magnitude of their slowdown is a lot more modest, it is a negative for the global economy. The question now, obviously, is how much will they slow down?"
Europe and Japan, with economies tied closely to the United States through trade routes and financial systems, caught America's cold first and have continued to feel its effects. European stock markets have taken a beating this week, and the European Commission warned Wednesday that some of the region's biggest economies, including Britain, Germany and Spain, are heading into recession.
The developing world had remained relatively resilient against the global turbulence -- particularly given the pummeling many countries took during the Asian and Latin American financial crises of the 1990s and the early 2000s. But as the First World economies now decelerate, demand for the goods and services from emerging markets is being curbed. Many developing countries had only recently been cashing in on the rise in commodities prices.
While they are still growing at rates that would be the envy of developed nations, the signs of a shift in fortunes are sprouting up from Shanghai to New Delhi to Sao Paulo.
In India, the high-tech and outsourcing sectors are softening as they absorb cutbacks from U.S. corporate clients. In China, diminished export expansion is cooling the economy from a growth rate of 12 percent last year to an estimated 9 to 10 percent this year, while the stock market in Shanghai has fallen more than 60 percent since its peak in October. In Brazil, exports slipped last month after surging for months.
Though still awash in oil money, Russia's economy lagged in August, a slowdown that was exacerbated when foreign investors pulled billions of dollars out of the country after its invasion of neighboring Georgia. Last week, the Russians intervened in the currency market more heavily than they had since the late 1990s to prop up the ruble, and the cost to protect government bonds from default shot up. The country's benchmark index on Thursday sank to its lowest since January 2006.
For the United States, there are pros and cons to the developing world's decelerating growth. On one hand, it is already contributing to falling commodity prices, driven up for years by the insatiable demand in emerging markets. Reduced oil imports by China -- now the world's second-largest consumer, after the United States -- is one factor behind the steep drop in gas prices at American pumps in recent weeks. Natural gas, as well as staples such as corn and wheat, have also taken double-digit-percentage falls off their highs.
But on the other hand, emerging-market cooling is adding to the overall drop in global growth, which is set to slide at least to 4.1 percent this year from 5 percent in 2007, according to the International Monetary Fund. That is likely to spell trouble for U.S. exports, which propped up the economy in the last quarter. That was especially true in the case of China, where a hunger for American medical equipment, soybeans and plastics have made it the largest market for U.S. goods outside North America. The strengthening dollar, which has made U.S. products more expensive overseas, is also likely to erase the recent export gains.
Emerging markets most linked to the developed world are suffering most. Mexico, bound to the U.S. market through NAFTA, is slowing down sharply, partly as remittances from immigrants in the United States plummet because of the loss of construction jobs. The Baltic states of Estonia and Latvia are heading into recession as Europe's economy buckles under the weight of the U.S. downturn, drying up the investment flows that buoyed those nations in recent years.