East West divide
October 5th, 2010
The split between the dynamic world of the emerging market and Asian countries, and the slower moving recovery of the West and Japan remains very pronounced.
Commentators used to worry about the world’s main economies being synchronised. If one rose they all rose, if one fell they all fell. This was thought to be a problem, which could worsen inflation and shorten cycles with too much competition for resources and too much credit at peaks.
Today we can worry about something different. The Chinese and Indian economies are not in the same cycle as the West. Both are at new high levels for output. Both have inflationary problems, India’s quite serious. Both have governments trying to rein in money and credit after a strong expansionary period.
Meanwhile the western economies, led by the US, Germany and the UK are making slower progress from the trough of 2008-9. They are finding it difficult to get credit and output growing quickly enough. Some western economies like Greece are in an even worse plight, with large debt overhangs causing high unemployment. Their output languishes well below the peak.
The slow growing and especially the heavily indebted western countries would like to export more to China and India. They want to see the emerging market economies expand some more, preferably based on expansion of consumer and investment demand which they can help supply. The two advanced economies which have been successful exporters, Germany and Japan, still seem keener on exporting more than on expanding their domestic demand. Japan is now trying to get her exchange rate down to help exporters, whilst China seems keen to avoid a major revaluation, also liking to export large volumes.
The most optimistic scenario is one where the adjustment in China and India in response to action to curb bank loans or put up interest rates takes place rapidly. This will lead to a second upswing cycle in these countries before the west has run out of steam in its recovery. The most worrying outlook is one where it takes longer to cool the Asian fast growth economies, with the authorities overdoing the action leading to a sharp slowdown. This would not be helpful to the slower west.
The figures continue to point to a rapidly changing world, where emerging market economies will be much bigger relative to the west. Meanwhile so many western portfolios are based on an out of date view of the world, with the bulk of their equity investments in Europe and America. It is true that the larger companies will invest and trade with the more dynamic parts of the world, but also true that there is a remorseless shift of economic power, revenue and income to the new economic powerhouses which may well also have an impact on asset values and the relative size of Stock markets. Have you taken into account the growing competitiveness and success of these new giants?
