Emerging and advanced economies are intertwined

Last week we published our last economic research report of 2016: Emerging markets, financial volatility, and opportunities for UK financial and related professional services.

This research, which is based on the latest discussion of our Independent Economists Group, takes a medium-term view of economic and financial trends in emerging markets and the potential opportunities these pose for UK-based financial and related professional services—even as 2016 itself was notable for the extent to which investor attention shifted markedly from emerging to developed economies.

Although our report addresses 'emerging markets' generally, one of its main conclusions is that in economic terms, China dominates that grouping and will continue to do so:

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The BRICs—Brazil, Russia, India and China—have for years been a collective by-word for large and dynamic emerging markets, although the acronym became famous because of research published by Goldman Sachs back in 2003—when global economic trends looked vastly different than they do now. (The acronym was actually coined even earlier, in this 2001 paper.) Aside from the extent to which the 2008-09 financial crisis has upended long-term economic projections, one thing that remains fascinating about the original Goldman research and its reception is how many commentators interpreted the report’s projections as forecasts and downplayed (or ignored) the important assumptions that underpinned the headline assertion that “…in less than 40 years, the BRICs economies together could be larger than the G6 in US dollar terms.” The projection was based on the assumption that the BRIC countries would “maintain policies and develop institutions that are supportive of growth”. In this sense, the projections were arguably best-case scenarios rather than baseline forecasts.

 

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Our own research notes that more than a decade on from the original BRICs analysis, India is the only other country among the foursome that is not experiencing weak or recessionary economic conditions. An important theme is therefore the need for increased differentiation in emerging-market analysis—EMs arguably show more divergence within their grouping than advanced economies show within theirs. Other delineations are perhaps useful—for example, commodity producers vs commodity consumers:

Our research also explores some of the economic and financial links between emerging and advanced economies, and how these have evolved over the last few years. For example, China has been an increasingly important source of final demand for advanced economies, and this means that the domestic impact of any future exchange-rate volatility in developed markets will depend on the strength of the Chinese economy. These relationships will doubtless continue to be transformed in the years ahead….

Looking ahead to the new year, it remains to be seen if 2017 will bring as many surprises as this past year did. Here on TheCityUK’s economics blog, I’ll continue writing about both the expected and unexpected as I explore not only the relationship between developed and emerging economies but economics and finance more broadly. Happy New Year!