Later this month the G-20 Leaders will meet in Antalya, Turkey for their annual summit1. Turkey is the current chair, having taken over from Australia. Following the summit the annual rotating leadership will pass to China2. The agenda for the summits are largely defined by the host, and have ranged over a wide territory including climate change, agriculture, money laundering, energy and the like. Arguably, though, the core concern of the group remains the health of the global economy, even if this task is primarily entrusted to the respective finance ministers and central bank governors (who continue to meet twice annually).
Accordingly, the forthcoming summit provides an opportunity to reflect on the current condition of the global economy, some eight years after serious banking stress first erupted in the euro zone. It is more than seven years since the bankruptcy of Lehman Brothers which touched off the most acute phase of the crisis, generating the worst decline in global economic activity in 70 years.
The period since can be divided into three periods. In the first phase, global demand was propped up by exceptional stimulus by the emerging markets (most of all China, but also India) while the advanced countries took emergency action to stabilise their banking systems.
A second phase commenced around 2010 when worries about inflation, asset bubbles and resource misallocation caused the emerging markets to pull in their horns, even as the euro zone crisis intensified. This combination has resulted in a steady deceleration of real global growth (measured at purchasing-power parity, or PPP exchange rates), from 5.4 per cent in 2010 to a projected 3.1 per cent in 2015 (all figures derived from the IMF's World Economic Outlook database, October 2015).
Within this aggregate the profiles are quite different. The advanced economies have gained some traction, from 1.2 per cent growthin 2012 (their weakest year as a group, largely on account of the euro crisis) to an estimated two per cent in 2015. At the same time the so-called emerging and developing countries, dominated by China, have steadily slowed from 7.4 per cent in 2010 to just around half that, an expected 3.9 per cent this year.
So even at a time when the US, the UK, the euro zone (less so Japan) are showing moderate growth; when the European Central Bank and the Bank of Japan are still engaged in quantitative easing; and when oil prices are relatively low, the emerging markets are proving to be a drag on global growth.
Two questions accordingly arise. First, what accounts for the emerging markets swoon? Second what can be done to reverse the trend?
Before addressing these questions, it is worth highlighting quite how substantially the global economy has evolved over the last seven years. Referring once again to the invaluable WEO global database, the share of emerging and developing economies in total global output in 2015 is projected at 58 per cent, as against around 50 per cent at the time of the crisis.
Comparisons at the country level are even more illuminating. Thus the real output of India at seven per cent of global output is thrice that of Britain, and 75 per cent larger than that of Japan. The group of countries that the IMF classifies as "emerging and developing Asia" (China, South Asia, ASEAN) is now the same size as the G-7 countries (consisting of the US and Canada; Japan; and the four largest European economies.)
The current juncture illustrates that real GDP, though important is not the only measure of global influence. The constant discussion in the financial press of the exchange rate of the dollar,and of the possible impact of Fed tightening indicates that presence in global money and finance is also of substantial importance.
To my knowledge there is no agreed measure of global monetary and financial presence; measuring GDP at market exchange rates is certainly not sufficient. A possible proxy is the survey of foreign exchange turnover in major currencies and markets made by the Bank for International Settlements (BIS). As we saw in 2008 and seem to observe once again today, turbulence in global financial markets continues to be a powerful shaper of emerging market prospects with the important difference that the scale of potential "echo" effects back on the advanced countries is now much larger.
To return to the two questions posed earlier, the weak and deteriorating performance of emerging markets in my view reflects a complex set of factors, many specific to individual countries, but some reflecting global developments. Among the former, the slowing of the Chinese economy is clearly of the greatest quantitative significance. I see this as largely policy-induced, with some overshootingbut also complicated by the meteoric rise of the US dollar to which it has had a de facto peg.
Slowing Chinese demand (particularly for minerals and metals) has had a knock-on effect on commodity producers in Latin America and Africa, although the issues facing two large non-Asian economies, Brazil and Russia are more political and specific. However, global financial factors are also at play, notably the withdrawal of financial capital from the emerging markets in the expectation of rising yields in the US, as well as the sharp rise in the dollar mentioned above.
As to the second question to some extent the emerging markets are enduring pain before feeling any gain, notably from exchange rate depreciation as well as for many (most of all India) the improvement in terms of trade represented by weak commodity prices. The uncomfortable fact remains: after the euphoria over "decoupling" immediately after the crisis, reality has intruded once again. Despite their heft, the emerging and developing markets remain vulnerable to shifts in global finance, where the underlying architecture of the monetary system really hasn't changed since the crisis. This should be a topic for discussion at Antalya, but I somehow doubt it will come up.
1. The G20 is composed of 19 sovereign countries, and the European Union.
The writer is chief economist, Royal Dutch Shell. The views are personal.