Thoughts on Ernst &Young’s Spring forecast for Rapid Growth Markets
The end of the first wave
The financial crisis of 2008 had many victims. One of the most significant was the fall in the appeal of the emerging markets as investment destinations for UK businesses. As was the case with many categories of investment, the crash demonstrated that there are no “certain” bets and investment in rapidly growing but still emerging markets carries its own risks. The emerging markets suffered particularly as they had been growing as such a rapid rate in the run up to the crash that their fall was greater in relative terms and hence the shock was multiplied.
In the aftermath of the crash, the analysis exposed the weakness of a number of the assumptions which had driven the rapid growth in investment in these new markets. The most significant was the debunking of the “decoupling” thesis. Following the Asian crisis of the late 90s and the subsequent recovery, the view that the regions of the world had “decoupled” from one other and hence become more resilient to a global shock took hold. However the impact of the slowdown of the Eurozone in particular illustrated how interconnected the regional economic groupings still were. Europe was a major destination for Asian imports and as demand for these imports fell, so Asian demand for commodities fell as a result: hitting economies as far afield as Brazil and Australia.
The re-emergence of the emergers
Just as the developed economies have embarked on structural reform programmes in response to the financial crisis so the emerging markets have also reviewed their economic policies. Much has been written about China and its drive to develop more of a balance between domestic consumption and export led growth but countries such as Indonesia, Columbia, Mexico and Vietnam have also sought to improve their economic performance. These changes together with the recovery in the USA and pro-growth policies being pursued by Japan and South Korea have changed the outlook for emerging markets in a very positive fashion.
The Ernst & Young/Oxford Economics Rapid Growth Markets Spring Forecast predicts a significant acceleration of growth in the emerging markets with our 25 fast growing markets heading up to growth rates in GDP of 6% per annum from 2014 onwards and widening the gap with the developed markets. As the chart below illustrates, this acceleration of growth is based upon a major growth in exports with the emerging countries in our sample passing developed countries in terms of the share of world exports accounted for by 2014 or 2015. This is a major shift in the balance of world trade power and suggests a more sustainable economic story for the emerging markets especially as intra- Asian and intra- Latin America trade becomes a more significant share of the growth: decoupling may be happening at last
Source: Oxford Economics
Time to dust off the investment plans
No investment is without risk and the challenges of emerging markets remain significant. However the expected growth is based on the combination of a number of factors: a more stable outlook for China; pro-growth policies in China and Japan; recovery in the USA; and a export led model with more sustainable growth rates. Moreover, the emerging markets continue on the whole to benefit from favourable demographics: a young and growing population; increasing education levels; and the emergence of a very large middle class. The opportunity appears to be of a scale, especially relative to expected growth rates in the UK’s largest export markets in Europe, to merit further attention.
Most likely as a reaction to previous experience, the UK is not making as much progress in these fast growing markets as previously hoped. The UK has had recent export successes in China and India but the Ernst & Young ITEM Club April forecast expects the UK’s share of world trade to keep falling over the next few years despite a favourable devaluing of the pound.
This suggests that UK business is missing opportunities. Now seems to be the perfect time to collect the data, identify the potential long list of opportunities and filer these down to a list for detailed research and planning. With growth in the Americas to be more than double that in Europe over the next 5 years and the equivalent figure for Asia to be more than four times the European rate, management and boards should ensure they have considered the options and are not left behind. There is no sure thing but the fundamentals do appear to be moving very quickly in the right direction.