By Michael Quach, Group Investment Strategist
Michael Quach considers whether the pace of growth in some of the world's largest emerging economies will continue.
Emerging economies, most notably the BRICS countries, have grown in importance owing to a faster rate of growth and increasing size relative to the global economy over the past decade. They are likely to continue outperforming given the potential for technological catch-up, lower labour costs and continued slow growth in the advanced economies as a result of the lingering financial crisis.
Emerging economies are set to account for around half of the global economy by 2030, according to the World Bank. In the short term however, they face a pullback in the pace of economic expansion given global uncertainties and slower trade. But this is unlikely to impact on future prospects for an increasingly multi-polar world economy.
Increased demand
The number of people classed as middle income is likely to increase rapidly as developing economies begin to prosper. In turn, this will lead to increased demand for consumer durables and natural resources. For example, demand for energy and water could lead to opportunities for environmentally friendly technologies. Cross-border trade in goods and services, such as health, finance and education, is also expected to expand dramatically.
Differing growth rates
The pace of growth within the emerging world is likely to vary from one economy to another depending on, among other factors, the stage of their economic development, the geopolitical risk environment, access to natural resources, demographics and good fortune. Certain countries will expand more rapidly, primarily on the back of a shift from agricultural to industrial-led economies and greater technological progress.
Others will expand at a slower pace or perhaps not at all. In such cases the easiest growth trajectory has already taken place and these countries face the challenge of transitioning towards a more service-related economy and the 'middle-income trap', i.e. the need to increase productivity through innovation. The last is likely to require major structural reforms of the economy to incentivise the private sector. Policymakers and investors in these countries may also need to manage an increasingly volatile socio-political climate and changing demographics.
Uncertain future?
So, while the secular story for the emerging world remains unchanged the recent financial crisis in the major advanced economies provides a major short-term headwind. The emerging world is not one homogenous class and given the multiple risks, it would be unwise to simply extrapolate past performance to gauge future success.
However, a more stable outlook for the global economy, combined with certain structural reforms, could result in the rapid expansion of the middle classes and provide future opportunities that are likely to include increased demand in areas such as consumer durables, natural resources and technology.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
