Global Economy – Emerging Markets Show Potential

2011 is proving to be an interesting year in terms of the global recovery from the financial crisis.

Globalisation and instantaneous communications have resulted in exceptionally quick reactions to market news adding to the complexity of the recovery. The recovery continues to evade text book predictions as market sentiment swings from positive, to stable, to negative and back again.

In examining market elements, the three key areas of interest are the US, developed Europe and emerging markets such as Brazil, Russia, India, China (BRICS) and Africa. Because of the immense short-term volatility of the market, Coface South Africa has chosen to look at medium-term indicators in forming an opinion on the possible scenario’s for the global economy.

The US

The US has been the driver of global consumption for at least 50 years. The reason being its large and wealthy consumer population with 307–million people, earning $47 284 /year (Source: International Monetary Fund).

The sub-prime crisis has however had a fundamental effect on the ability of the American consumer to consume. This is because it has tightened credit facilities (which were used by many consumers to live beyond their means, evident in the 120% debt-to-income ratio of American’s pre-crisis) and a jobless recovery as companies streamline their operations in an effort to become more efficient and profitable in a difficult market.

This hampering of consumer expenditure is seen in the following graph which shows the low growth in corporate profits as well as the disposable income and expenditure of US consumers in the second quarter of 2011.

In addition, the recent increase in the US government’s debt ceiling and subsequent controversial US ratings change by Standard and Poors’ have placed the American government in a difficult situation regarding the repayment of now even more debt.

The medium term outlook for America as described by the Congressional Budget Office of the American Government is a recovery back to a 3% deficit (currently 8,9% before the increase of the debt ceiling) by the year 2016.

Developed Europe

Developed Europe, represented by the United Kingdom, France, Germany, Italy and Spain, is currently in the grips of a debt web that includes Greece, Ireland and Portugal. The extent of indebtedness within this region varies from country to country but includes both public and private debt.

The austerity measures being implemented in these countries are extreme and are expected to result in very low growth from this entire region for the next four to five years.

BRICS

In contrast to the developed economies, emerging markets have continued to perform well during 2010 and for the first half of 2011, with growth in Brazil, Russia, India and China. The inclusion of South Africa as a representative of Africa into the BRIC grouping has resulted in the group now representing 31,9% of global land-mass and 56% of the global population, making this a potentially powerful future market grouping.

In addition to the size of the consumer market, the resources these countries hold are impressive. Brazil has one of the most quickly developing agriculture sectors, Russia is the world’s largest producer of oil and gas, India the second largest telecommunications producer, China the largest manufacturer and Africa has the greatest mineral resources. These combined resources provide a springboard for the infrastructure development necessary to empower consumer spending and fuel growth.

A study by Goldman Sachs gives some predictions for the medium term development of these economies. Predictions are that the middle class consumer market development is set to drastically increase in the next 10 years.

Challenges for the BRIC economies include poverty alleviation, skills development, infrastructure development, governance, environmental balance and political stability. These challenges are not easily overcome. However, there is great potential for growth in these markets in the next 10 years.

In conclusion, the medium-term predictions are at best sluggish growth in the US and developed Europe for the next five years. Increased development, demand and growth from the BRIC countries including Africa.