As we swing into the fall, exporters have a lot of issues to wrestle with. Top of the list is concern about the state of global trade, and the popular backlash to globalization. With NAFTA renegotiation is full swing, most are hoping for the best…but also considering opportunities in other markets. With CETA soon to be inked, eyes are on European possibilities. There are also rumblings about a future agreement with China, and the CEPA deal with India is still a possibility. Small wonder that there’s now more talk about trade diversification than I have heard for awhile. With growth picking up in the US, Europe and other OECD markets, is there any sign of a spillover into the emerging world?
One key signal is export performance. When the Great Recession blew in, export-dependent emerging markets were pummeled. China’s trade intensity – the sum of exports and imports as a share of GDP – went from almost 70 per cent to less than 50 per cent in a memorable two-year plunge. That would have been catastrophic for the economy had the government not stepped in with a very substantial stimulus package. What makes this shift far worse is that in the seven odd intervening years, it hasn’t changed. That chunk of GDP never came back. Not every emerging economy suffered as much as China, but they have collectively realized much slower growth in export activity in the post-2010 period.
Until recently, that is. Since late 2016, inflation-adjusted export activity across emerging markets has been somewhat more animated. With inflation-adjusted exports averaging growth in the 2-3 per cent range since 2012, year-on-year growth jumped through the first half of this year to 5 per cent. That’s still a far cry from the double-digit growth that was common early in the new millennium, but it does appear to be breaking with the gloomy post-recession trend.
What is the source of the action? Latin America is showing some signs of movement, but inconsistent from country to country. Collectively, Africa and the Middle East saw a flash of growth in 2016, but it has since faded. On the other hand, Emerging Asia seems to be moving upward in a way we haven’t seen since 2012. Both exports and imports are rising enough to shift trade intensity upward in a manner we haven’t seen for years. It also suggests that the region is dealing with some of those excessive inventories of goods that piled up during the slow-growth years. Emerging Europe is also putting out more impressive numbers.
Industrial production is another gauge. There’s a notable shift in trend growth in developing markets during the past year, and again, it seems to be Emerging Asia and Eastern Europe that are taking the lead.
Prices of equities – a noted leading indicator of overall economic activity – are also on the march. The MSCI share price index for all emerging economies is up on a year-to-year basis by 20 per cent, the highest annual growth since 2010, and the trend is currently up. The bearish sentiment that followed the 2014-16 commodity price plunge is now giving way to a dramatic rush of optimism, according to measures of the investor mood.
While these signals hint that something may be in the works in the emerging world, it is still too recent and too modest to suggest that there is a conclusive turnaround in the works. Emerging economies generally have some distance to go before past excesses will be sopped up, and uncertainty around global trading arrangements will keep exporters and investors the world over on tenterhooks until there is some form of resolution. Still, when that moment occurs, this growing segment of the world economy promises to impress again with annual increases in GDP that make the developed world blanch. Waiting for that moment to arrive is almost too late, as it runs the risk of getting lost in the rush of returning deal-doers. If a revival in growth is inevitable, then diversification is a good ‘now’ strategy.
The bottom line?
Growth fundamentals suggest that emerging markets will soon catch the wave of growth that is washing through the developed world. Data point to early signs that the surf’s getting up. Instead of watching from binoculars on the beach, maybe it’s time to wax the board, paddle out and get ready to ride – before the crowd catches on.
