European Central Bank President Jean-Claude Trichet said last week after the ECB left its key interest rate unchanged at 1.0 percent: “Downside concerns remain relating to a stronger or more protracted negative feedback loop between the real economy and the turmoil in financial markets. … Renewed increases in oil and other commodity prices, the intensification of protectionist pressures, more unfavorable than expected labor market conditions, and lastly, adverse developments in the world economy stemming from a disorderly correction of global imbalances … While uncertainty is still high, there are increasing signs that the global recession is bottoming out. … On the upside, there may be stronger-than-anticipated effects stemming from macro economic stimulus being provided and from other policy measures taken.”
In the mean time, I took a quick look at who is going to lead the recovery and with what kind of force the recovery, which so many are pinning their hopes on, will happen.
Well it won’t be the developed economies for now. So what could we expect from the leading emerging economies, the BRICs?
The basic question is relatively simple: “Can emerging economies’ growing consumers, which is an undeniable fact, replace contracting U.S. consumers?”
In 2008, using 2008 IMF data, U.S. private consumption was about $10 trillion. That was 1.25 times China’s 2008 GDP where private Chinese consumption accounts for 36.9 percent or $2.9 trillion of its GDP.
European Union consumption was about $9 trillion, and Asian consumption was still below $5 trillion.
U.S. private consumption accounts for about 14.5 percent of global GDP while Chinese consumption is about 4.2 percent of global GDP. Asian consumption has grown in the last decade but is still only 38 percent of U.S. consumption.
Markus Jaeger of Deutsche Bank describes it all very well: “Domestic demand may be able to help offset the slowing external demand for key emerging markets, but it will only partly offset the likely permanent reduction in foreign demand. However, even if emerging market domestic demand grows quickly, it will be dwarfed by that of the G7, providing little support for G7 and global demand.”
He added that, "However fast demand in the EM-6 grows, it will remain small in comparison to G7 demand for the foreseeable future and will therefore have only a limited effect on G7 net exports and economic growth."
In 2008, private total consumption in the BRIC countries was 70 percent of U.S. consumption, with 36.9 percent or $2.9 trillion of GDP in China, 55.7 percent or $1.83 trillion in India, 48.5 percent or $1.1 trillion in Russia, and 60.7 percent or $1.2 trillion in Brazil.
So, an increase in the U.S. savings rate that could easily surprise on the upside, and further reduction in U.S. consumption will mean a significant reduction in global GDP.
The BRICs won’t be able to compensate for that. It’s simple a question of arithmetic. That doesn’t mean there won’t be good investment opportunities in the emerging economies.
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