Is there a shift in economic power to the emerging markets?

This week the International Monetary Fund (IMF) released data and forecasts predicating that the global economy will grow at approximately 4.8% this year. This is far above global trends of the last 10 years, which typically lies within the region of 3.7% –4.2% range and is exactly what you would expect from a recovering global economy. Nevertheless, the IMF revised down growth rates for the major developed nations such as the UK, US, Eurozone and Japan, suggesting that these advanced economies will contribute less to economic growth. With emerging markets still expanding rapidly will there be a time when the global economic power shifts towards these emerging nations?

Developed nations are currently in a rather sticky position, with most of their economies forecasting below trend growth rates for the next couple of years. The high levels of government debt further exacerbate this problem, leaving most governments unable to provide the economic assistance their countries require. Most advanced economies are currently undergoing massive austerity measures, which will reduce approximately 1.25% of their combined growth in 2011. This is the largest ever fiscal tightening and could further jeopardise future growth for the advanced economies. These advanced economies are also facing the mammoth task of generating large numbers of jobs, especially when facing record high unemployment rates such as those in the US and Eurozone, that have now reached 9.6% and 10.1%.

In comparison, the emerging market nations such as Brazil, Russia, India and China (BRICs) are all enjoying high levels of growth, almost too fast, with most introducing measures in an attempt to slow down their rapidly expanding economies. The growth of their economies is fundamentally transforming their working class by increasing the general standard of living for the average citizen and providing them with newfound purchasing power. The expansion of the consumer classes in these countries has helped them grow independently of the global economy. In further contrast to developed nations, the level of public debt in the majority of emerging nations is insignificant in comparison to their more advanced counterparts. This allows them to operate a more business-friendly environment of low taxation and increased spending on public services and infrastructure.

However, we are currently living in the era of globalisation and it would be naïve to believe that the fate of the emerging markets and developed economies is not intertwined. The growth stories in the emerging markets directly benefits international companies and their host nations. Furthermore, the cheap labour costs and resources that the emerging markets possess make it possible for international companies to produce goods more cheaply, lowering the rate of inflation across the developed nations. While emerging markets are clearly better suited to the current economic environment they are all generally dependant on strength of the developed nations’ consumers to purchase their exports and raw materials.

With the divergence of growth rates between the advanced economies and emerging markets it is not difficult to imagine that emerging markets will play a more important role on the global stage, both economically and politically. Even so, it is highly unlikely that emerging markets will grow smoothly and they are likely to undergo many setbacks themselves.