Global Trends by Martin Khor

Monday 23 July 2012

Developing economies slowing down

Developing countries are now facing an economic slowdown resulting from the Eurozone crisis, with a deterioration in GDP growth, exports and lending conditions.

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Developing countries are increasingly being adversely affected by the economic recession in Europe and the slowdown in the United States.

The hope that major emerging economies like China, India and Brazil would continue to have robust growth, de-coupling from Western economies and becoming an alternative engine of global growth has been dashed by recent data showing that they are themselves weakening.

Just as during the 2008-2010 global crisis, a decline in exports caused by falling Western demand is the main way in which the developing countries are being hit. 

The inflows of capital into developing countries have also slowed down, and a reversal to a new outflow situation may well take place.  The lending conditions of banks in emerging economies have also deteriorated, according to a banking industry survey.

Recent reports confirm the slowdown in many major developing economies.

In China, growth of the gross domestic product fell to 7.6% in the second quarter of this year, denoting a continuous deceleration from 10.4% in 2010, 9.2% in 2011 and 8.1% in first-quarter 2012. 

The IMF has lowered its growth projection for India to 6.1% for 2012.  This compares to 6.5% last year and 8.4% in the preceeding two years.

The Singapore economy contracted 1.1 per cent in the second quarter over the previous quarter at an annualised rate, mainly due to manufacturing output falling by 6 per cent. 

For Malaysia, the growth rate for 2012 is projected to be 4.2% by the Malaysian Institute for Economic Research.  This is lower than last year’s 5.1 per cent growth, which had also slowed to 4.7 per cent in the first quarter.

In Indonesia, the Central Bank said that growth was slowing and projected the rate to be 6.2 per cent for 2012, compared to 6.5% last year (and 6.3% in the first quarter).

In South America, two of the largest economies are also facing decelerating growth prospects.  

For Brazil, the government has lowered its growth projection for 2012 to 3 per cent (from 4.5% earlier) but the IMF’s latest growth estimate is even lower at 2.5%.  Industrial production declined by 4.3 per cent in the 12 months to May.  Growth in 2011 was 2.7 per cent.

Argentina had one of the fastest growing economies in the world.  Growth was 8.9 per cent in 2011, and the average annual growth was 7.6 per cent in 2003-2010.  But the economy contracted by 0.5 per cent in the 12 months to May.  Industrial production in June fell 4.4 per cent on the year due mainly to a 31 per cent decline in the auto sector.

In South Africa, growth in the first quarter was 2.7 per cent over the previous quarter, which was down from the 3.2 per cent growth of fourth-quarter 2011. 

Last Friday, the new World Bank President Jim Yong Kim warned that the debt crisis in Europe would hurt most regions in the world.  If a major European crisis develops, the developing countries’ economic growth rate could be cut by 4 per cent or more, he predicted.

Even if the eurozone crisis is contained, it could still reduce growth in most of the world's regions by as much as 1.5 per cent.

Also last week, the International Monetary Fund in its latest world economic outlook gave a downbeat picture of how developing countries are now being adversely affected by the European and US economic situation.

It warned that the ability of governments worldwide to respond to the new slowdown has become limited. And while the withdrawal of capital from developing countries was not at critical levels, there could be problems for some if conditions deteriorate. 

The prevalent view about the prospects of developing economies has almost suddenly changed from their being the emerging leaders of the global economy to their also being victims of the Western slowdown.

A paper by Yilmaz Akyuz, chief economist of the South Centre, shows that the theory of the “staggering rise of the South” had vastly exaggerated the developing countries’ de-coupling from the economic fortunes or misfortunes of the developed countries.

Much of the high growth in developing countries in the past decade has been due to the favourable external conditions generated by the Western countries. 

The high consumption growth in the United States was a main basis for the high growth of manufactured exports from China and other East Asian countries, and these together also underlay the boom in commodity prices that lifted growth in Africa and South America.

The boom in capital flows into major developing countries also helped to fuel their growth and covered the current deficits of several of them.

The global crisis in 2008-2009 slowed down the developing countries’ export growth and reversed the capital flows, but the strong anti-recession actions (fiscal stimulus, low interest rates and expansion of liquidity) in developed countries resulted in the resumption of export growth and capital inflows in the developing countries.

However, with the developed countries ending their reflationary policies and instead switching to austerity budgets and with their low interest rates having little effect, the recessionary conditions in Europe are now impacting adversely on developing countries.

With the positive conditions that supported the South’s rise no longer in place and in fact turning negative, the developing countries’ prospects have dimmed, prompting the need for a change in development strategy.    

Meanwhile the Wall Street Journal of 19 July reported that lending conditions in emerging economies deteriorated in recent months due to the euro zone crisis.

According to a report of the Institute of International Finance, credit standards grew tighter in emerging-market banks around the world, while bad loans increased in the second quarter.

The results suggest trouble ahead for emerging economies, with banks in Asia and Latin America showing deeper caution, which can lead to weaker lending.

The survey in June, covering 132 emerging-market banks, showed a worsening in overall lending conditions for the fourth straight quarter. Almost half of emerging-market banks said funding conditions in international markets tightened in the prior three months, while less than 9% said they eased.

A third of emerging-market banks expected bad loans to rise in the third quarter, while only about 15% expected them to drop.