The Wall Street Journal-20080126-Hot Topic- Can Emerging Markets Avert U-S- Chill-
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Hot Topic: Can Emerging Markets Avert U.S. Chill?
Global stock markets swooned this past week as fears about a U.S. recession mounted, challenging the idea that emerging-market economies had "decoupled" themselves from the U.S.
Some economists have suggested that emerging markets' strong growth last year despite U.S. troubles caused by the subprime-mortgage market underscored the increasing economic independence of the developing world.
But emerging-market stocks have fallen nearly 15% this year, and the S&P 500 is down 9.4%. On Tuesday, Hong Kong's Hang Seng Index dropped 5.5%, its biggest point decline ever. Stocks in India fell 7.4%; in Singapore, 6%; and in South Korea, 2.9%. While many of those markets rebounded later in the week, the declines prompted analysts at the World Economic Forum in Davos, Switzerland, to pour cold water on the idea that developing nations have decoupled from the U.S.
Here's a closer look:
Exports: The decoupling thesis rests on the premise that emerging markets can weather the decline in U.S. demand for imports thanks to their own rising domestic consumer spending. The U.S. accounts for about 20% of all global imports.
While there are signs Asia is becoming less dependent on the U.S. -- the U.S. share of total exports from Asia declined to around 17% in the first half of 2007, from 24% in 2000 -- Asia relies on exports more than ever. Excluding Japan, exports accounted for 55% of regional gross domestic product in 2007, up from 40% in 2001.
Consumer spending: Critics of the decoupling thesis argue that emerging markets can't match U.S. consumption, which reached 72% of U.S. GDP last year. U.S. consumers bought $9.5 trillion of goods and services last year, far more than China's $1 trillion or India's $650 billion, according to Stephen Roach, chairman of Morgan Stanley in Asia.
At Davos Wednesday, Yu Yongding, director of China's Institute of World Economics, said the U.S. crunch would be keenly felt in China because the Chinese domestic market wouldn't replace the loss of U.S. demand. But the impact of a U.S. slowdown could be less severe in countries that have a booming middle class, including India and Russia, said Jack Dzierwa, a global strategist at U.S. Global Investors.
Infrastructure: While emerging markets may not be completely immune to the effects of a U.S. slowdown, increased government spending could weaken the impact. China plans to spend $100 billion on railway construction over the next five years, and India has budgeted $494 billion of infrastructure spending over the same period. Saudi Arabia will spend $1 trillion on infrastructure over the next 15 years.
Reserves: Even if a global recession is in the offing, emerging markets may be better positioned this time because their large foreign-exchange reserves provide some cushion and prevent those countries from defaulting on debts. Total central-bank reserves for emerging markets amount to $4.1 trillion, including $1.5 trillion in China. Russia has $160 billion, and Brazil has $185 billion.
-- Nick Timiraos
POINTS OF VIEW
The rest of the world will actually keep the U.S. afloat during this period when the U.S. is slowing down for internal reasons."
-- Fred Bergsten, Peterson Institute for International Economics
"Many investors still believe that the credit crisis is purely a U.S. subprime problem. Nothing could be farther from the truth. There appears to be a growing global credit pandemic."
-- Richard Bernstein, Merrill Lynch & Co.
FACTS
-- The S&P 500-stock index has declined 9.4% this month. The index fell 8.6% in November, the worst monthly decline since September 2002.
-- China is poised to overtake Germany as the world's third-largest economy this year, behind the U.S. and Japan. China's economy expanded 11.4% last year, the fastest rate in 13 years.
-- Some 58% of Americans believe globalization has been bad for the U.S. economy, according to a December WSJ/NBC News poll, compared with 48% who felt that way 10 years ago.
-- Analysts at Citigroup have said that without a U.S. recession, Latin American stocks would post gains of around 25%, but a U.S. recession could trigger losses of equal size.
-- One sign of India's expanding middle class: Indian auto maker Tata Motors introduced a subcompact car this month that it will sell for $2,500.
-- Egypt, Croatia and Ghana ranked among the most improved emerging markets last year in a World Bank report.
-- Of the five main food, energy and industrial commodities -- grain and meat, oil and coal, and steel -- Chinese consumption has outstripped the U.S. in all but oil, according to the Earth Policy Institute.
-- India's middle class is expected to increase from 5% of the population to more than 40% by 2025, creating the world's fifth- largest consumer market, according to the McKinsey Global Institute.
