The Chinese economic juggernaut continues to roll on, undeterred either by half-hearted attempts of the government to reduce speed, or the bleating of economists that a slowdown is just around the corner. They’ve been predicting a deceleration for years, yet Chinese gross domestic product grew by 11.9% in the first quarter, an extraordinary pace even by Chinese standards and the fastest quarterly growth in 11 years. And just to put that growth in perspective, the Chinese economy expanded by 10.7% last year, the fastest growth since 1995, when the economy was a third of its current size.
Back home, we haven’t been doing too badly either, with GDP growth at 9.4% last fiscal and the Prime Minister’s Economic Advisory Council saying it’ll grow another 9% this year. If the past is any guide, it’ll probably do better than that—last August, the council had predicted GDP growth of 7.9% for FY2007.
Nor is the trend of higher growth limited to India and China. The Organization for Economic Cooperation and Development’s leading indicator of economic growth is at its strongest level since May 2006. The International Monetary Fund’s chief economist says he’ll be revising global growth forecasts, because of the ongoing global boom. Could it be that, despite all the talk of excess liquidity, there’s more to this current stock market rally? Could it be that it’s being driven by the “fundamentals”—the prospect of stronger economic growth?
Well, here’s the data: forecasts of global economic growth are being revised upwards. In January this year, the Economist magazine’s poll of economists estimated this year’s GDP growth at 2.2% for the US, 1.9% for Japan, 9.4% for China, 2.4% for Britain, 7.4% for India and 2% for the Euro Area.
Six months later, here are the results of the magazine’s poll: US 2.1%, Japan 2.6%, China 10.3%, Britain 2.8, India 8.1 and the Euro area 2.7%. What’s more, going by the Chinese and Indian estimates, the forecasts seem to be erring on the side of excessive caution.
There are other straws in the wind that indicate another global growth spurt: commodity and energy prices are once again moving up. The Continuous CRB Index, which includes crude oil, gasoline, natural gas, heating oil, precious and industrial metals, grains and oil seeds, soft commodities, cotton and livestock, recently reached a 42 year high.
Of course, excess liquidity is a big factor in stoking that growth. An abundance of money has driven interest rates low, which has led to the spurt in global growth. On the other hand, it could just as easily be argued that a combination of globalization and technological innovation has led to a “new paradigm”, which, in turn is capable of generating far higher rates of global growth without inflation.
Take a look at the current inflation numbers: while they’re appreciably higher in China, they’re lower almost everywhere else than a year ago. In the US, consumer price inflation is 2.7%, compared to 4.3% a year ago; in the EU, it’s 1.9%, compared to 2.5% a year ago; in Japan it’s zero, compared to 0.1% and in Britain, it’s 2.4% versus 2.5% one year back. Of course, the rise of inflation in China is worrying, but, like in India, it’s caused by higher food prices and does not call for any tightening of monetary policy.
The other interesting trend is that this global growth is happening at a time when the US economy is very weak. US GDP rose by a mere 0.7% in the first quarter, but that hasn’t prevented the rest of the world, particularly the emerging economies, from notching up spectacular growth rates. This divergence of growth rates has led many to speculate on whether the rest of the world is decoupling from the US economy.
They’re certainly growing faster. Global independent research outfit BCA Research points out, the developing world contributed 50% of global growth in 2006, compared to less than 20% in 1998. Well, 1998 may not be the best year for purposes of comparison, since many of the Asian economies had been hurt badly by the Asian crisis, but the point is that emerging economies are becoming bigger, their share in world trade is increasing, their credit ratings are improving, and all this is being reflected in their stockmarkets outperforming those of the developed world.
For instance, despite all the hype about the Dow crossing 14,000, the fact of the matter is that the MSCI Emerging Markets index is up 7.97% this month to 19 July, compared to a rise of 3.28% for the World index and 3.32% for the MSCI US index.
Emerging markets continue to do better than those in the developed world, which is as it should be, given their higher economic growth. As a recent Merrill Lynch report put it, “Global decoupling is more than just a cyclical call. We also believe that non-US trend growth is higher than consensus currently estimates. We believe the market is not yet priced for (global decoupling) longevity.”
What are the risks to this rosy scenario? In its World Economic Outlook published earlier this year, the IMF says “There is a clear asymmetry in cross-country asset price correlations, with correlations increasing significantly during bear markets and recessions.” This may help explain why global contractions tend to be more highly synchronized across countries than global expansions.
Some recent research suggests that the US plays a key role in the dissemination and propagation of financial shocks. So, keep a wary eye on those credit spreads.
Mint’s resident markets expert Manas Chakravarty looks at trends and issues related to investing in general and Indian bourses in particular. Your comments are welcome at email@example.com.