A new normal prevails, because the global economy has changed in a way that will see emerging markets continue to out-perform developed markets over the longer term, Kevin Lings says.
Emerging economies started to out-perform the United States economy when the US went into recession following the 9/11 terrorist attacks in 2001, Lings says. Until that time, emerging economies had performed more or less in line with developed economies.
The 1998 emerging markets crisis was the catalyst that paved the way for emerging countries to begin to out-perform their more developed peers, he says. Before the 1998 crisis, emerging market economies were not very well managed, Lings says.
However, the crisis resulted in emerging countries focusing on managing their economies better. For example, 16 of them now have inflation-targeting policies.
Certain factors have caused emerging economies to out-perform and will result in their continuing to do so, Lings says.
The first factor, he says, is that in order for an economy to grow, there has to be fixed investment – spending on schools, railway lines, roads, harbours, and so on.
Since the turn of the century, emerging economies have been increasing their average spend on fixed investment, and it now exceeds 30 percent of their annual average gross domestic product (GDP), Lings says. Developed economies, on the other hand, have been decreasing their spending on fixed investments, and it is now on average less than 20 percent of their average GDP. This is why there is a gap of four percentage points between the average rate of growth in the economies of emerging countries and those of developed countries, Lings says.
Although it can be argued that the US spent money on fixed investment in the 1960s and 1970s, this infrastructure is now old and in need of renewal, he says.
The world has changed, with emerging economies to an increasing extent taking on the role of the producers of goods for the rest of the world, Lings says.
The US is trying to find a new way to become a producer, and this is why President Barack Obama is focusing on green energy, he says.
Another factor that is influencing the different rates of economic growth in developed and emerging economies is the level of government debt, Lings says.
There has been a steady increase in the level of debt in developed economies since the start of the 21st century, and the increase has been rapid since the 2008 credit crisis, he says. Developed economies are now more indebted than emerging ones, Lings says. In the US, for example, the ratio of debt to GDP is now 100 percent, he says.
In emerging economies, government debt levels relative to GDP have been declining, and they are now less than 40 percent.
It is much easier for emerging economies to spend money on fixed investment, because their debt levels are low. Their finances are in good shape, Lings says.
At its peak, the US’s GDP made up 31 percent of the world’s GDP. Its GDP is now down to 24 percent of the world’s GDP.
China, the second-biggest economy in the world, makes up 8.7 percent of the world’s economy.
While China’s GDP is still small relative to that of the world’s GDP, it is growing at a rapid rate, Lings says. Should current growth trends continue, China will be the biggest economy in the world by 2027.
The Stanlib economist says that some people are concerned about the security of Chinese banks because of China’s rising interest rates, but China controls its banks and the credit they give in order to control the growth in the economy.
The Chinese government wants to keep the economy growing at seven to eight percent a year. It regards six percent as too slow and 10 percent as too fast, Lings says.
In the US, GDP growth was 2.9 percent last year, and this year it is expected to be 3.1 percent.
Up until last year, investors have followed the money into emerging countries that are showing faster growth and, as a result, their equity markets have out-performed, he says. However, towards the end of last year, investors began to reinvest in developed markets, and these markets may out-perform in the short term, Lings says.
However, he says, this is a mini-theme, based on the fact that emerging markets have become expensive relative to developed ones.
Investors are looking to the US in particular and realising that, although it has problems, it is not broken, he says. They are seeing short-term opportunities in the US equity market, because some shares have been sold down to relatively cheap levels.
There are some signs of a recovery in the US: jobs are starting to be created, vehicle sales are up and credit card debt is up rather than down for the first time in 27 months, Lings says.
Americans are still reducing their household debt, but the rate at which they are doing so has slowed.
However, Lings says, the US has to create a large number of jobs to get its economy going again.
During the recession that started after the 2008 credit crisis, the US lost 8.5 million jobs, and it has regained less than one million of those, Lings says.
The country needs to create 14 million jobs to get back to its previous best level of unemployment.
The number of months it takes for the US to regain the jobs it loses during a recession is increasing with each recession, Lings says.
To have the vibrancy to be able to compete with China, the US needs to create jobs quickly, and the longer it takes to do so, the more emerging markets gain on the US, he says.
Lings says the US is also facing housing problems, and homes are the backbone of the US consumer market, influencing spending habits. The US has too many houses, and many are vacant and in the hands of the banks.
The number of foreclosures is still increasing: 2.9 million homes were repossessed last year.
The debts owed on more than 30 percent of US houses are at a higher level than their current value. This keeps the price of houses down, he says.
The US could struggle once the liquidity that the central bank has created in the monetary system is removed, Lings says.
All the evidence points to a new normal, in which the US will continue to lose economic power to emerging markets, Lings says.
SUB-SAHARAN AFRICA IS AN EXCITING INVESTMENT FRONTIER
Another significant change in the world order is that African economies, particularly in sub-Saharan Africa, are looking attractive to investors, Stanlib economist Kevin Lings says.
As a result, South Africa, which offers a gateway to the rest of Africa, has been invited by China to join the Bric (Brazil, Russia, India and China) nations summit.
However, South Africa’s economic growth is lagging that of the rest of the African sub-continent.
Sub-Saharan countries have had average gross domestic product (GDP) growth of more than five percent a year since 2001, except for 2009.
In 2009, the average GDP growth of sub-Saharan countries slowed to 2.5 percent, but these countries did not go into a recession as did many developed economies.
Sub-Saharan countries are spending an increasing amount on fixed investment: last year this spending was on average 23.3 percent, Lings says. These countries have money to spend on fixed investment, because their savings rates as a percentage of GDP have on average been in excess of 20 percent since 2006, Lings says.
On average, government debt in sub-Saharan Africa has fallen from over 70 percent in 2000 to just over 30 percent last year. This is a reversal of the situation that prevailed in the 1960s and 1970s, Lings says.
There are about 800 million people in sub-Saharan Africa in economies that are growing at 6.5 percent a year, and this is what makes the sub-continent attractive as an investment, Lings says.
And the private sector is attracted to the region, with foreign capital flows to sub-Saharan Africa reaching about US$36.6 billion last year, he says.
South Africa is lagging its African counterparts and needs to address its unemployment problems urgently to ensure that it can remain in the Bric club and act as a gateway to the rest of Africa, Lings says.
Although the local bond market has attracted high foreign inflows, this is short-term money and the trend is already reversing. Longer-term net investments (inflows less the outflows) amounting to well over R400 billion have been made into the equity market, but South Africa needs to increase its economic growth if it is to retain foreign investors, Lings says.
Many of South Africa’s problems are a result of the shortage of jobs, he says, and more employment must be created to ensure that the local economy grows at a rate higher than its current rate of three percent a year.
South Africa’s recovery from the 2009 recession is being led by consumer spending, but this spending is a result of low interest rates, a low inflation rate of 4.3 percent and wage increases that averaged 8.5 percent last year, Lings says. The only way to keep the consumer recovery on track is to create jobs or grant more consumer debt. Consumer debt, however, is not desirable and more jobs are the only way to keep the economy growing, Lings says.
The consumer-led recovery is also vulnerable to rising inflation, which is likely to be a factor this year, Lings says.
South Africa needs to spend money on fixed investment in order to create jobs, Lings says. This spending was at low levels in the second and third quarters of 2010 after being negative since the start of 2009, he says.
The government’s new growth plan aims to create jobs in the public sector. The number of public sector jobs and public sector wages have been rising sharply, whereas the private sector has been shedding jobs, Lings says. The problem with this scenario is that taxes paid by the private sector fund the public sector, he says.
The number of people who are receiving social grants, paid from taxes, is now approaching 15 million.
The South African education system is under pressure, with about 650 000 learners writing their final exams each year, but about 50 percent of South Africans in the age group 18 to 24 are unemployed, Lings says.
Most countries regard an unemployment rate that exceeds 10 percent as very high, he says. Unemployment, particularly among young people, should be addressed urgently to avoid a popular uprising in the short term and its having a detrimental effect on the economy in the longer term.