ASIA NEWS
Updated August 11, 2013, 11:54 p.m. ET
Emerging World Loses Growth Lead
Global-Trade Decline Dulls Developing Markets as Outlook Brightens in More-Established Economies
By ALEX FRANGOS in Hong Kong, SUDEEP REDDYin Washington, and JOHN LYONSin São Paulo
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China, India and Brazil are disappointing investors. Manufacturing and export growth have slowed in all three countries. Why are stocks from developing countries doing better than those from the major developing economies? WSJ's Jason Bellini has #TheShortAnswer. Image: Getty
Momentum in the global economy is shifting to the developed world, away from the emerging economies that had led growth since the financial crisis.
For the first time since mid-2007, the advanced economies, including Japan, the U.S. and Europe, together are contributing more to growth in the $74 trillion global economy than the emerging nations, including China, India and Brazil, according to an estimate by investment firm Bridgewater Associates LP.
The turnabout may reshape world capital flows and upend forecasts that corporations had built around ebullient hopes for emerging markets.
Among forces driving the shift: a resurgent Japan that for years was a weakling of the global economy. Japan's economy expanded 2.6% on an annualized basis last quarter, the government reported early Monday, slower than the revised 3.8% first-quarter pace but a meaningful change after years of stagnation.
The recovering U.S. economy has produced steady, albeit tepid, growth. And Europe's economy is estimated to have expanded slightly in the latest quarter after a long recession, new reports this week are expected to show.
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At the same time, the emerging world's big guns—such as Brazil, Russia, India and China—are ailing or ratcheting back from their stellar performance of recent years. The International Monetary Fund forecasts the global economy to expand 3.3% this year, compared with 3.2% in 2012 and 4% in 2011.
The shift could create new challenges for companies with big global operations. Some are already feeling the pinch.
Conditions around the world "have slowed down to a much greater degree than we had anticipated," said Richard White, chief executive of Flexible Steel Lacing Co., Downers Grove, Ill.
The privately held seller of products for belt conveyors used in manufacturing and mining had planned on its annual sales growth to ease to about 12% this year from 20% in recent years. Instead, sales are flat, he said. As a result, the company's employment in the U.S., home to almost two-thirds of its 900 workers, is staying flat, he said.
"The root cause seems to be China," said Mr. White, whose firm operates in 10 nations and sells into more than 150. "The demand that they had going—the need for iron ore, copper and coal—was driving mining activity in Australia, South Africa and South America."
The latest rebalancing of global growth is nascent and could reverse, should emerging economies bounce back even a little.
Many emerging-market economies remain the world's fastest-growing, even if they aren't expanding as quickly as before. Beijing's official full-year growth target of 7.5% would make this year the slowest since 1990, still far surpassing the U.S. pace of about 2%, though some economists figure China will grow even slower than the government target. Economists expect many smaller emerging economies from Southeast Asia to South America to grow at relatively strong rates, though more slowly than in prior years.
One sign emerging economies aren't directly benefiting from the growth pickup in more mature markets: Emerging-market purchasing managers indexes, a proxy for GDP growth, hit their lowest level since early 2009, according to an aggregate gauge compiled by the economic consulting firm Capital Economics. The same measures for the U.S., Europe and Japan were expanding.
Europe's tentative recovery hasn't translated yet into increased trade that could help emerging economies. Japan's renaissance—it is the fastest-growing large developed economy—also hasn't trickled through to its neighbors. Japan's recovery has come with a sharply weaker yen, which makes imports more expensive and means Japanese are more apt to buy things made at home.
The Bridgewater measure, based in part on an estimate of current growth rates rather than official data, shows the U.S., Japan and other developed markets contributing about 60% of the roughly $2.4 trillion in additional economic activity economists expect in the world this year. Bridgewater, the world's largest hedge fund, is known for its global economic analysis and performed well during most of the financial crisis.
Some multinational companies say the slowdown isn't a deterrent. Emerging markets "continue to be a fantastic source of opportunity," Herbert Hainer, chief executive of Germany-based sportswear giant Adidas AG, told analysts last week.
But Adidas' results show a short-term impact. Russia's slowdown weighed on its results, Mr. Hainer said, and its China revenue grew 6% in the first half, compared with 19% growth in the first half last year and 38% growth in the first half of 2011.
There is no one reason emerging economies are suffering.
Rising U.S. interest rates have squeezed credit in parts of the emerging world.
The nature of the U.S. recovery plays a part. Consumer demand drove the past two U.S. expansions but has been modest in recent years, meaning slower growth in demand for foreign goods.
The U.S. expansion has benefited from domestic energy production, which creates demand for U.S.-made equipment. Stagnant U.S. wages mean lower relative labor costs. This U.S. expansion's peculiarities are among indications that a long pattern, in which developed-world growth supported emerging-world exporters, could be breaking down in places like Asia.
"We can't ride on the coattails of the West," said Frederic Neumann, co-head of Asian economics for HSBC Holdings PLC. "Asia has become too big."
Chinese economic indicators in recent days show a bottoming out of its slowdown. But China's damped demand for commodities has affected Latin America and Southeast Asia.
Brazil, Latin America's biggest economy, has stagnated partly due to China's waning appetite for products like iron ore. Brazil's GDP grew about 1% last year after growing 7.5% in 2010.
Indonesia, Southeast Asia's largest economy, is taking a hit from China's slowdown, with exports of coal and palm oil suffering. Its GDP grew 5.9% year-over-year in the second quarter, the worst showing since 2010.
In India, economic mismanagement has led to a plunging currency and widening current-account deficits. Bankers there are holding back credit, making it hard for businesses to invest and for consumers to spend.
Some global companies still voice optimism. Profits at Brazil's Vale SA, a major iron-ore producer, have fallen for eight straight quarters. China, its biggest customer, will continue to need Brazilian ore, said Jose Carlos Martins, Vale's director of strategy.
"There are a lot of people losing sleep over China," he said, "but I don't lose sleep over China."
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