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The Developing World Outproduces the Developed World

Based on the latest forecasts from the International Monetary Fund (IMF), the global economy is finally lifting out of the deep post-financial crisis of 2008. The IMF is an international organization headquartered in Washington, DC made up of 189 countries working to foster global monetary cooperation and trade, among other causes.

The IMF now forecasts that the global economy will grow by 3.5% and 3.6% on average in 2017 and 2018, up from the 3.2% pace over the last two years.

The IMF also forecasts that the advanced economies (US, Europe and Japan) will average 2% GDP growth for 2017-2018, up from the unprecedented anemic growth of only 1.1% on average over the past almost nine years since the Great Recession.

The latest IMF forecast has the United States growing by an average of 2.4% in 2017-2018, with Europe at 1.7% and Japan at 0.9%. While these projections are an improvement since the last IMF forecasts, annual growth in the advanced economies is expected to remain considerably below the longer-term trend of 2.9% recorded during the 1980-2007 pre-crisis period.

The question is, how can the global economy expand by 3.5%-3.6% when the advanced economies are growing at only 2%? The answer is that the developing/emerging economies are growing at a much faster rate. The IMF forecasts that the developing economies will see GDP growth of 4.6% on average in 2017-2018.

According to the latest projections from the IMF, growth in the developing world in 2017-2018 is expected to be concentrated in India (7.5%), China (6.4%) and Indonesia (5.1%).

While it was encouraging to see that global growth is finally on the rise again, there was a very surprising finding in the latest IMF economic projections. For as long as economic data has been kept, the advanced world economies have always produced more goods and services (GDP) each year than the developing world. Yet that’s all changing if the IMF is correct.

From 1980 to 2007 (pre-crisis), the advanced economies accounted for an average of 59% of world GDP (measured in terms of purchasing power parity), whereas the combined share of developing and emerging economies was 41%. That was then. Yet according to the IMF’s latest forecast, those shares will completely reverse by 2018: 41% for the advanced economies and 59% for the developing world. That’s huge!

The pendulum of global economic growth is swinging dramatically from the so-called advanced countries to the emerging and developing economies. Hat tip to Professor Stephen Roach of Yale University for bringing this to my attention.  Mr. Roach, the former chief economist at Morgan Stanley, raised three salient questions regarding this significant shift in global production.

First, Mr. Roach questions the effectiveness of central bank monetary policy. He points out that the anemic economic recovery in the developed world has occurred against the backdrop of the most dramatic monetary easing in history – eight years of interest rates near zero and enormous liquidity injections (QE) from central banks.

Roach laments that these unconventional policies have had only a limited impact on real economic activity, middle-class jobs and wages.

Second, Roach questions whether the developing world has finally broken free of its long-standing dependence on the developed world. Roach has long argued against such a “decoupling” but says, “The facts now speak otherwise. This attests to a developing world that is now far less dependent on the global trade cycle and more reliant on internal demand.”

Finally, Roach questions whether China has played a disproportionate role in reshaping the world economy. He notes that China’s dependence on exports as a percent of its GDP has dropped from 35% in 2007 to only 20% in 2015. Yet China remains the world’s largest exporter, and Roach believes this has indeed helped reshape the world economy.

Roach also points out that the explosive growth of e-commerce (Internet) in China has provided a significant shortcut to a newly vibrant consumer culture that was unavailable to today’s advanced economies at a similar stage of development.  Roach concludes:

“All of this speaks to a radically different world than that which prevailed prior to the Great Financial Crisis – a world that raises profound questions about the efficacy of monetary policy, development strategies and the [outsized] role of China.

While some healing of an $80 trillion global economy is now evident, progress needs to be seen through a different lens than used in past cycles. A world turned inside out — with new dynamism in the developing world far eclipsing lingering malaise in the advanced economies — is new… but hardly normal.”

This is a fascinating topic and one I’ll return to in the weeks and months ahead.

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