Group Economics
Macro Weekly Divergence everywhere
Han de Jong +31 20 628 4201
18 September 2015 The global economy is currently characterised by a significant divergence: advanced economies are doing quite well, but emerging economies are struggling. In an integrated world economy such divergence cannot last for a very long period. An amazing divergence also appears to develop (or perhaps it has existed for some time already) within the policy committee of the US Federal Reserve. This all creates uncertainty. We have lowered our growth forecasts for a number of important emerging economies. Struggling EMs
improving public finances. The basis for growth in these
Emerging economies are having an increasingly difficult time
economies has broadened in recent quarters.
this year. There are several reasons for this. First and foremost is the cooling in China, or more specifically, the cooling of the
Divergence cannot last very long
industrial sector in China. Many other EMs are highly
The chart on this page shows the PMIs for industrialised
dependent on industrial activity in China and, as a result, they
countries and for emerging economies. In an integrated world
are all feeling the effects. A second, but related factor, is the
economy one would expect the correlation between the two to
weakness of commodity prices, which is causing a serious
be high. And it is. A couple of important points need to be
deterioration in the terms of trade for many EMs, which is a
made here. First, PMIs for emerging economies do not have a
significant headwind. Furthermore, political fragility is affecting
particularly long record. And one should probably be careful
a number of EMs as is poor macroeconomic management.
interpreting this series, in particular as regards the level.
Brazil in particular features high on all such lists. Its economy
However, it is clear that the PMI for emerging economies has
has fallen into recession and it is hard to see what
fallen consistently this year (and has fallen below 50 recently).
policymakers can do to turn things around. Inflation has risen
On the other hand, the PMI for advanced economies has
and the central bank has raised interest rates in response. This
stabilised this year at a level well in excess of 50.
is understandable, but not good for short-term growth prospects. In addition, economic weakness has affected public
PMI Manufacturing
finances and the response here is that action has to be taken
Index, <50 = negative, >50 = positive
to prevent too severe a deterioration. This also is bad for
60
growth. And if this was not bad enough, the political situation complicates matters even more, with the various corruption
55
scandals and the record low popularity of President Dilma Rousseff, who was only elected to her second term last year.
50
On top of all these factors, EMs are under pressure from a tightening of financial conditions as capital is flowing out of these economies. There is a lot of talk about this tightening of
45 10
11
12
Developed economies
13
14
15
Emerging markets
financial conditions, sometimes dubbed quantitative tightening. It is, however, extremely difficult to gauge the magnitude and
Source: Thomson Reuters Datastream
to assess the effects. I would suggest that such a divergence cannot last very long. Advanced economies doing well
Either the advanced economies will pull up the EMs or the
At the other end of the spectrum, advanced economies are
EMs will drag down the advanced economies. Most likely, it
doing well. Growth in the US and in the eurozone in particular,
will be somewhere in between. The key questions here appear
while unspectacular, is above the long-term trend in these
to be whether or not China will experience a hard landing, how
economies, resulting in falling unemployment rates and