There is evidence all around us of the fragility of our situation globally. It seems appropriate, at this point in the sequence of posts on Century of Light, to share this link to last Saturday’s Guardian article by Larry Elliott and Phillip Inman. Below is a short extract: for the full post see link.
Emerging markets, once the world’s great economic hope, could see the good times end as Beijing falters. We look at which countries are most vulnerable to the 21st century’s next financial crisis.
Tumbling share prices. A sell-off in commodity markets. Capital flight from some of the world’s riskier countries. Hints of a looming currency war. Financial markets ended last week in panic mode as fears emerged that the world was about to enter the next phase of the crisis that began eight years ago in August 2007.
Back then, the problems began in the developed world – in American and European banks – and spread to the rest of the world. The bigger emerging markets – China and India most notably – recovered quickly and acted as the locomotive for global growth while the west was struggling.
There was talk of how the future would be dominated by the five Brics countries – Brazil, Russia, India, China and South Africa – and by 11 more emerging market economies, including Turkey, Indonesia, Mexico and Nigeria.
That has happened. Emerging market countries are dominating the news – but for all the wrong reasons. And because, after years of rapid growth, they now account for a bigger slice of the global economy, a crisis would have more serious ramifications than in the past.
Emerging markets have a habit of causing trouble. For a quarter of a century after the Latin American debt crisis erupted in Mexico in 1982, the story was of a storm moving from the periphery of the global economy towards its core, the advanced nations that make up the G7. Mexico ran into fresh problems in 1994, there was an Asian debt crisis in 1997, and a Russian default in 1998 before the dotcom bubble burst in 2001. That proved to be a dress rehearsal for the near meltdown of the global financial system in 2007-08.
Now the focus is back squarely on emerging markets. The problem is a relatively simple one. In the post-Great Recession world, the tendency has been for all countries to try to export their way out of trouble. But this model works only if the exports can find a home, as they did when China was growing at double-digit rates.
But in the past 18 months, the Chinese economy has slowed, causing problems for two distinct groups of emerging-market economies – the east Asian countries that sell components and finished goods to their big neighbour, and countries that supply China with the fuel and raw materials to keep its industrial machine going.
China’s slowdown has led to a slump in the price of oil and industrial metals. In theory, this should have no net effect on the global economy because lower incomes for commodity-producing countries should be offset by the boost to countries that import commodities.
It hasn’t quite worked out that way. Consumers in Europe, Japan and North America have not used the windfall from cheaper energy to go on a spending spree. Meanwhile, emerging market economies are hurting badly. With the western economies one new recession away from deflation, China is making its exports cheaper by devaluing its currency just as oil producers are flooding the world with crude in a bid to balance their budgets.
In the past three decades, there has been a crisis every seven years on average. Financial markets are well aware that recovery from the last downturn remains unfinished. The nervousness is easy to understand.