Emerging Markets To Drive Economic Recovery

The global recession has begun to affect everyone. Europe is in crisis with fears over a Greek or Spanish exit. The US is experiencing economic slowdown and now China, Brazil and India have begun to feel the effects or the Euro crisis with a slowdown in growth. 

Many economists including Andrew Sentence of the Monetary Policy Committee believe that both the UK and Europe will undergo a period of consolidation over the next few years with little growth. Economists are looking to the emerging markets which are forecast to continue to grow, albeit at lower rates of growth, and become dominant forces in the global markets over the next few years. China in particular is forecast to continue to grow and could overtake the US as the world largest economy within 5 years time. The economy in Brazil is also forecast to grow over the next few years as the country will benefit from its large pool of natural resources, together with a further boost from hosting the next world cup and Olympics. Investors and small businesses will be wise to look to invest in these economies as a source of growth over the medium term.

The last time the UK was in this recessionary economic cycle was in the late 1990’s where the country experienced disappointing growth and high inflation. The emerging markets continued to show strong growth during this time, especially in Asia. The recession in the 1990’s was caused by growth in the 1980’s backed by financial exuberance and borrowing which was not sustainable and the market eventually crashed in 1998. There were several factors involved including the internet bubble and the financial crisis created by the US sub prime loans.

The current financial crisis is much the same with a number of countries and banks taking on excessive levels of debt. China may be experiencing a slowdown at present but the economy is still growing albeit at a slower rate (China reported growth of 7.6% in the Second Quarter of 2012). This will continue to put upward pressure on oil and commodity prices.

A European crash is inevitable but the UK should avoid significant damage due to its history of strong economic policy. The UK continues to give positive signals to the market through the current economic policy of cutting the deficit. UK employment has also been resilient during times of economic depression. The fact that the UK is seen as a safe haven in Europe could also prove to be a benefit should companies and investors look to move their funds out of Europe in the event of a crash. Whilst the UK should not suffer unduly from a European recession, we can expect very low growth over the next few years. 

The US on the other hand has a strong manufacturing base and is well poised to grow its way out of the current recession. It is likely that the US economy will grow slowly over the next few years but should recover more quickly than the UK and the rest of Europe.