The Power Shift

It is shifting back from emerging markets to developed markets…

Since the term BRIC (Brazil, Russia, India & China) was first coined in 2002 by Goldman Sachs, the story of global growth has been the story of the rise of emerging markets. While Russia was driven by oil and Brazil by commodities, China and India were driven by the demographic dividends of their billion plus populations. But things are suddenly changing in the last 3 years…

Post the Lehman crisis…

 The Lehman crisis in late 2008 put the developed markets of the US and Europe in a precarious condition. As debt soared, liquidity tightened and growth collapsed, the global GDP trend shifted gradually out of the developed markets and in favor of the emerging markets. Post 2009, as the share of emerging markets in global real GDP started rising, the share of the developed markets started falling. In 2009, emerging markets accounted for 35% of global real GDP while the developed markets accounted for around 42%. By mid 2013, this equation had shifted drastically in favor of emerging markets. By mid 2013, emerging markets accounted for 48% of global real GDP while the developed markets accounted for just 32%.

Things changed post 2013…

Even as the US grappled with low inflation and the EU grappled with the Greek problem, things took a distinct shift in favor of developed markets. Post the taper announcement, the pressure was visible on the emerging markets. As liquidity dried up in the US markets, many commodity producers felt the brunt. Things took a turn for the worse with the oil and commodity slowdown in 2014. By 2015, the share of emerging markets in global real GDP was down from a peak of 48% to 34%. During the same period, the share of developed markets in global real GDP had risen from a trough of 31% to a high of 43%. Interestingly, this trend is likely to get more pronounced in favor of developed markets in the year 2016.

What will drive this trend in 2016?

The fastest growing economies in 2016 will still be emerging markets like India, China, Indonesia and Mexico. But emerging markets will pay a huge price for the fall in China’s growth. On the other hand, US, Canada, UK, Japan and Germany are likely to grow in the range of 2-2.5%. On their current large GDP base, this will only help to underscore their leadership.

As the EU gets back to growth and the US creates record jobs, Russia and Brazil are likely to face the brunt of weak commodity prices and bad policy decisions. A slowing China and negative growth from Russia and Brazil will weigh on emerging markets in 2016. For the developed markets, the year 2016 may actually belong to them. ©

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