The immediate economic prospects of the emerging market economies, including China, are the worst they have been since the 2008-2009 Great Economic Recession. Yet US policymakers seem to pay scant attention to those economies. They ignore these economies at their peril, for not only are they now highly important for the global economy. They also have all too important ties to the global financial system, and — in the event of a deepening of the current emerging market downturn — could deal a body-blow to that system.
There is every prospect that the present economic difficulties in both China and the other emerging market economies will become more acute in 2016. China is trying to move away from its investment and export-led growth model at the very same time that its credit bubble is bursting and capital flight is accelerating. This makes it all too likely that China’s economic growth will again slow in 2016 well beyond the official forecast.
A clerk counts Chinese 100 yuan banknotes at a branch of a foreign bank in Beijing January 4, 2016. REUTERS/Kim Kyung-Hoon.
Meanwhile, major emerging market economies like Brazil, Indonesia, Russia, and South Africa are having to deal with a major bust in international commodity prices and a major reversal in international capital flows to the United States. This is sending their currencies plunging, and clouds their immediate economic outlook.
There are at least two reasons why US policymakers should be concerned about more trouble in the emerging market economies. The first is that their importance in the global economy has increased dramatically over the past decade. Indeed, according to IMF estimates, on a purchasing power parity basis, the emerging markets now account for more than half of the world’s GDP. These economies have become simply too large to ignore.
The second reason is that the emerging markets are closely integrated into the global financial system. Considering that China is the world’s second largest economy, there is the very real risk that a further significant weakening in the Chinese currency as a result of its present difficulties could precipitate a global currency war. It would do so as other Asian countries (including Japan) together with Europe would seek to weaken their currencies to preclude China from gaining a competitive advantage.
At the same time, a further deepening in the emerging market’s economic woes could undermine the ability of its corporate sector to repay loans, especially should the emerging market currencies continue to plummet. In that respect, one has to be concerned that, according to the Bank for International Settlements, over the past five years the emerging market corporates increased their US-dollar denominated indebtedness by US$3 ¼ trillion.
Hopefully, the Federal Reserve is closely monitoring emerging market developments. For if they are not, the US economy could be in for some rough sailing in the year ahead.
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