Shift in global economic power

Emerging economies that were growing rapidly, particularly Brazil and Russia, are both now in recession. Commodity prices have played a considerable role in sending these economies into reverse, although this has been compounded by political developments in these countries.

The previous major engine of global growth, China, has also seen its economy slowing. Although still growing at a brisk pace compared with mature western economies, by the double digit standards that China set for itself in past decades it is unquestionably experiencing slower growth. This has happened at the same time as, and is related to, China rebalancing its economic growth model from reliance on exports and capital investment towards domestic consumption and services. One consequence of this has been lower demand for imported commodities, which has been one factor depressing global prices, particularly in areas like metals.

In contrast to India, some of the other most positive looking prospects for growth just a few years ago have been hit hard by falling commodity prices. These include a number of African countries that were seen as having great potential for rapid growth a few years ago, including Nigeria (dependent on oil and gas), South Africa (coal and metals) and other smaller economies such as Angola (oil and various minerals). Africa had, in fact, been the fastest growing global region over the past decade, with the middle class in sub-Saharan Africa expected to grow 6% per annum, from 33m in 2010 to 107m in 2030^[1]. The working age population in Africa is expected to rise by 273bn from 2010 to 2025 – raising the challenge of addressing significant skill shortages when 50% of the population live off less than $1.25 per day^[2]. Africa does retain great potential, but lower commodity prices have highlighted the need for more diversified economies with strengths in sectors with strong job-creating potential.

So does all this mean that the shift in economic power is a less valid trend today than it was a few years ago? That seems unlikely in the longer term as China and India in particular continue to raise their productivity level towards western levels, while having vast populations. But what recent developments demonstrate is the importance of taking a nuanced and differentiated approach to assessing the prospects for specific emerging and developed economies. While the consensus appears to be that over the next few years the global economy will have a relatively low commodity price environment, looking further ahead, the highly volatile nature of commodity prices will continue to drive the prospects for some economies, while also making the case for greater sectoral diversification.

Businesses that are investing, or already invested, in emerging economies will need to make a careful assessment of whether and, if so, how they should manage in these more volatile market conditions, where prospects look less certain today than they did even a few years ago. The need to spread risks across economies with different characteristics in order to manage potential volatility will become more important than ever.

Of course investors have always had to be aware of the ‘micro’ risks that doing business in certain jurisdictions may present. But there is also now a need for greater awareness of the ‘macro’ risks and therefore a need to proceed with an appropriate degree of caution while not forgetting the continuing greater long term growth potential of emerging economies as a whole.