Driver of global growth is shifting from developed to developing markets

23 February 2017 Consultancy.uk

In a new report from PwC, titled 'Winning in maturing markets', the consultancy firm explores how growth markets have been affected by a range of internal and external conditions, and the knock on effect this has had for growth in the near term. While considerable uncertainty reigns in the US, the current long-term prospect for growth market remains positive.

Internal pressures

The firm notes that key growth markets are facing a range of pressures from domestic factors. Across many of the markets, inflation has increased significantly, averaging between 3-5% since 2013, compared to the global average of 1.5%. Export dependent countries, such as those across Latin America, were particularly hard hit.

Commodity price indices

A range of factors have affected inflation levels, including severe weather events reducing crop yields, poor supply chain planning leading to waste and sharp currency depreciations. The consequences of inflation, the firm notes, are wide ranging, from lower domestic consumer consumption to market uncertainty and a flow on effect on production costs.

Changes in domestic policies from key global heavyweights, including China, Brazil and Russia, have had internal as well as global ramifications. China’s moves away from a focus on manufacturing towards services, while also looking to boost internal consumption and reign in investment led growth, has resulted in a lower demand for commodities, as well as lower growth. Brazil has fallen into crisis following the introduction of 'populist policies' that were mismanaged and a corruption scandal which together led to the impeachment of President Dilma Rousseff. Russia has continued to find itself in a period of low growth as lower commodity prices and international sanctions bite into key revenue streams, resulting in a 3.7% contraction in 2015; inflation hitting 15.5% in 2015; while capital investments felling 10% in 2015.

Capital flows to growth markets

External pressures

While internal pressures have affected China, Brazil and Russia, external factors too have had considerable impact on the respective economies. The drop in commodity prices have hit Russia and Brazil particularly hard, with the countries accounting for in excess of 40% of growth market commodity exports. The US becoming a major oil producer, as well as a wider trends in the oil space, have had further negative effects on growth economies more widely; furthermore, the effect on key growth markets from lower commodity prices have themselves had knock on effects on neighbouring economies, with the World Bank estimating that a 1 percentage point drop in growth in Brazil or Russia has a knock on effect of negative 0.5 percentage points to regional markets over a two year period.

The consultancy firm further notes that the US Federal Reserve's rates increase affected growth markets, making US equities more attractive for global investors; and, in light of regional instability, capital flowed from growth markets into the US. The movement of capital further boosted the strength of the US dollar, which created additional challenges for countries and companies with US-dollar debt, as well as wider impacts to regional currencies.

Share in quantum of GDP growth

Future growth prospects

While growth markets have been hit by both internal and external negative pressures on growth, the longer-term prospects remain relatively rosy – although current US political uncertainty means predictions remain difficult. Growth markets on average, have become the major drivers for global GDP growth since 2010, and will, according to the firm’s analysis, account for 62% of total global growth between 2011 and 2021. Even with the current tougher conditions, growth markets will still account for 53% of the global $5.3 trillion GDP growth for 2017, and, by 2021 the GDP growth of growth markets is projected to increase by a further almost $1 trillion on 2017, while developed markets are to see a small contraction in their total share of continued growth.

High and low risk developing economies

Risk markets

To better understand the current growth and debt levels for growth economies, the consultancy firm mapped government gross debt against GDP growth for 2016. The measures, the firm argues, provide insight into the relative risk profiles of the respective markets.

The analysis suggests that particularly the Latin American economies of Brazil and Argentina find themselves in potential strife, facing high debt and low growth – with Argentina also facing risks from high inflation. Angola and South Africa too find themselves in the uncomfortable position of high debt with low growth.

Egypt and India, among others, while highly indebted, continue to enjoy strong economic growth, while some countries that find themselves in contraction, such as Nigeria and Russia, do not face considerable pressures from their debt. The research notes a range of countries whose debt to GDP growth ratios remain relatively positive, including Iran, Turkey, Indonesia, Bangladesh, Thailand and China.

David Wijeratne, PwC’s Growth Markets Centre Leader, says, “As we enter 2017, it’s clear that growth markets are on the verge of a new era of leading global growth in which they are projected to enjoy almost two times the absolute growth in GDP as compared to developed markets by 2021, and account for 65% of global growth within the next five years. This will create significant opportunities for private sector players looking to create and deliver value to the billions of people expected to join the middle class in these markets.”

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