Emerging markets could surpass G7 by 2030

27 July 2017 Consultancy.uk

Major emerging economies are projected to outperform the GDP of major developed economies by 2030. Colombia is projected to become the fastest growing nation in Latin America, while Vietnam is already among the top three most rapidly expanding Asian economies.

The emerging seven markets (E7) are set to surpass top developed economies (G7) in terms of total GDP by 2030. Continued strong economic growth and large population bases have resulted in the rapid development of the E7, which is projected to see strong economic growth in the long-term, even if countries such as Russia, Brazil and China are currently suffering contractions or slowdowns in their economic activity.

Other rising economies across the South-East Asia and Latin America are presenting attractive opportunities for international expansion, leading to booming foreign investment in the regions – according to a newly released report from PwC.

While these emerging economic powerhouses have seen an upturn in their fortunes, the major players in the global economy have seen slow growth or severe contractions during a tumultuous decade following the financial crisis of 2008. In particular, the bail-out nations have found themselves with significantly lower GDPs than Q4 2007, prior to the financial crisis. The Greek economy is around 25% smaller than it was prior to the crisis, while Italy is 4.6% smaller. Portugal too remains negatively affected, although its economy is almost achieving relative growth, while Spain is almost at levels last seen in 2007.

The US meanwhile has managed to grow its economy by around 12.5%, and the Euro zone has, on the back of lower growth to its periphery members, seen total growth reach 4.6%. While that figure seems low, at around a third that of the US, key members including Germany (9%) and France (5%), have managed to larger levels of growth.

Current size of economy compared to pre-crisis level

In the meantime, a number of the E7 have seen their economic activity impacted by global level events. The shift in China away from manufacturing and infrastructure led growth towards consumption-based economy has been implicated in the reduction of commodity prices, while a supply glut in the energy market has seen the fall in energy prices – particularly crude, as many researchers anticipate the arrival of "peak energy".

Another area of impact on emerging economies has been the ramping up of exchange rates in the US. The indirect effect has been a reduction in capital flows to emerging markets, and even considerable outflows, as US financial assets became more attractive, and investors more weary. According to PwC’s analysis, the knock on effects of continued rate rises are unlikely to be as drastic as during the 1997 Asian financial crisis.

In fact, emerging economies are cited as being better positioned to weather the rates hike. The US Federal Reserve has signalled that it is planning to raise the rate slowly, which offers companies across the regions with time to develop their foreign debt management strategies. Monitory policies, left over from the 1997 crisis, mean that many emerging economies moved towards more flexible exchange rate regimes. Meanwhile, the appreciation of commodity prices is actually positively impacting the foreign exchange reserves and export revenues – while improving investor confidence, and thereby, reducing outflows.

Vietnam’s exports are moving away from commodities, while Columbia outperforms

While large emerging economies had in recent years garnered the limelight, as they grew rapidly, then fell into various forms of crisis, a number of smaller regional economies offer ample opportunities for growth.

Top performers of tomorrow

Vietnam, PwC researchers point out, offers strong economic fundamentals, as well as a broad focus on creating long-term economic prosperity. The country is leveraging foreign direct investment to create a range of high-value export products, including mobile phones and computers, moving away from the low-cost, low-value manufacturing, favoured by other Asian economies.

The country’s economy has steadily moved away from commodity export dependence since the early 2000s and is now projected to be one of the top three fastest growing economies in Asia. It has meanwhile made key strides toward stable social and political infrastructure, which economists have earmarked as key factors to sustainable prosperity.

Colombia is another country that has in recent years offered a strong economic story, in contrast to its neighbours whose economies have suffered from various political upheavals along with economic sanctions and punitive debt levels. The most notable of these has been Brazil, who saw a contraction of 3.8% in 2014 during a sustained period of political unrest.

Colombia’s economy has enjoyed positive growth over the past seven years, although it has tapered off to around 2.5% in 2016, on the back of macroeconomic conditions. Its 10 largest neighbours, however, have seen an average contraction of -1.3% in 2016. The country is set to see its economic activity further boosted, on the back of a $70 billion investment in infrastructure spending over the coming 20 years. Colombia therefore has the potential to become the fastest growing nation in Latin America, over the coming decades.

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