SEOUL, KOREA – Emerging markets growth improves, but still well below pre-crisis levels
The HSBC Emerging Markets Index rose to 52.9 in the final quarter of 2012, up from 52.2 in the third quarter.
The improvement is more than welcome. Over the summer, as the Eurozone crisis went from bad to worse, it eemed for a moment that the world might be heading back into the abyss. Thankfully, that scenario has been avoided. Still, the latest readings are hardly consistent with buoyant economic growth. They’re still well below the levels recorded in late-2009 and early-2010 as the world economy recovered from the 2008 Lehman crisis and even further below pre-crisis levels.
The main reason for the improvement is a turnaround in manufacturing conditions. Following a modest contraction in the third quarter, activity picked up in the fourth quarter. There are also encouraging signs for the early months of 2013. Stocks of finished goods fell in the fourth quarter following an earlier phase of what appears to have been involuntary restocking associated with the Eurozone crisis. New orders are picking up, growing at their second-fastest rate since the second quarter of 2011.
Much of this better news appears to be domestically-led: export orders are still contracting, although not at the worrying pace seen mid-year. Continuous weakness in the global economy has had a variable impact on emerging market prospects. Smaller markets with higher export dependencies have been hit harder than others, not so much because their export performance has been any worse but, rather, because they lack large domestic markets.
Manufacturing activity levels are, thus, much lower in the Czech Republic, Israel, Poland, South Africa, Singapore, Taiwan and South Korea than in Brazil, China, India, Russia, Turkey and Mexico.
Admittedly, the larger economies have their own problems: in Brazil, the hoped-for boom in investment ahead of the 2014 FIFA World Cup has failed to materialise while, in India, infrastructure shortfalls, particularly related to roads, railways and power generation, have led to significant supply-side constraints. Some emerging market difficulties are, it turns out, home-grown.
China also suffered mid-year and, although there has been some modest improvement since then, it can hardly be said that the Middle Kingdom has regained its former poise. Still, the fourth quarter increase in manufacturing new orders marks the first gain since the second quarter of 2011, thanks to a renewed pick-up in domestic infrastructure investment. As a result, the outlook for Chinese growth is improving: HSBC projects GDP growth of 8.6 per cent in 2013, up from 7.8 per cent in 2012. For the emerging world as a whole, HSBC expects growth of 5.4 per cent in 2013, up from 4.8 per cent in 2012.
China is pivotal in this story. Although, on our projections, growth doesn’t return to the pace witnessed pre-financial crisis, China is now a much bigger economy than it was back then. As a result, although its own growth rate may have slowed, its contribution to global growth is on the rise. On our calculations, China will make its biggest-ever contribution to global growth in 2014.
Thanks to China’s enhanced gravitational pull, it’s useful to think about the world economy in terms of two separate narratives: an “old world” story focused on the ongoing deleveraging in Europe and the US and a “new world” story focused on the structural dynamism of the emerging world and, in particular, China. At HSBC, we’ve termed this story “The Great Rotation”. We are moving away from a US- or Europe-led world to a world led by China. So far the benefits have accrued mostly to those markets either geographically close to China or important in satisfying China’s insatiable demand for commodities. Many of them are emerging economies.
One way to measure this is to look at the overall increase in exports to China as a share of a country’s GDP since the beginning of the 21st Century. The results are striking. South Korea’s exports to China now amount to 12% of South Korea’s GDP whereas, in 2000, they accounted for a more modest 3.5%. Likewise, Malaysia and Singapore have experienced big increases in their export exposure to China. Commodity producers – including Australia, Chile, Kazakhstan and Saudi Arabia – have also shared in the spoils. And, demonstrating China’s ever-increasing connections with Africa, Angola is now China’s 14th most important source of imports, ahead of France, Canada, Italy and the UK. Interestingly, India is also behind Angola: the lack of trade between India and China must count as one of the great missed opportunities of recent years.
The “old world” has yet to catch the China express. The US exports a mere 0.7% of its GDP to China. Canada, France and Italy are more or less the same. The UK’s exposure to China is lamentable: exports to China account for only 0.4% of UK GDP, not much more than a rounding error. Japan and Germany do a lot better yet their higher exposures can’t hide underlying weaknesses. In Japan’s case, its uneasy political relationship with its mainland rival – exemplified in an unresolved island dispute – led to a collapse in exports from Japan to China in the second half of 2012. Meanwhile, Germany’s heightened trade relationship with China has been absolutely swamped by an even bigger increase in its dependency on the rest of Europe, one reason why, despite its competitive advantages, Germany found itself succumbing in the second half of 2012 to a crisis which had already engulfed other parts of the Eurozone.
There can be no doubt that a stronger China connection pays dividends. Those economies which have increased their trade exposure to China – typically at the expense of their exposures to the “old world” – have mostly enjoyed rapid gains in economic activity over the last decade or so. In contrast, those economies which have shunned China’s advances have mostly found themselves suffering from persistently disappointing GDP growth. The Emerging Markets Index may not be particularly strong at the moment but China is set to have a bigger influence than either the US or Europe on the economic destiny of many emerging markets.
by Stephen King
HSBC Group Chief Economist