Slower global growth a good thing?
The world economy may be slowing as China and other emerging economies decelerate and the West continues its gradual recovery.
But growing at a more sustainable pace isn't necessarily a bad thing. Of course, it depends on the nature of the slowdown.
First, consider global economic growth in context. World gross domestic product (GDP) expanded at over 4% during the 2000s before the US and European crises. That is a percentage point higher than during the entire previous half century.
Led by China and India, emerging economies grew at 7.5%, while advanced economies expanded by some 2.6%. Debt-fuelled consumption in the US and in some parts of Europe was one reason. The very strong growth of emerging economies was another.
Before 2000, emerging economies grew at 3.6%, so their growth more than doubled over the next decade. These economies became more globally integrated and many ran trade surpluses selling to the US and Europe, which significantly boosted their economies.
But since the global financial crisis, more of this growth has been debt-fuelled instead of export-driven. The Bank for International Settlements estimates that debt has grown by $33 trillion across the world since 2007. That is equal to half the world economy's annual output.
This isn't the most sustainable source of growth, as the West has learned.
So when growth slows in places like China, where credit has expanded too rapidly, it isn't necessarily a bad outcome. The challenge is to manage the slowdown. This isn't straightforward.
What is evident is that trade is less a driver of growth now for these countries as Europeans and Americans consume in moderation. This means that countries with large current account deficits (the broadest measure that includes money flows as well as trade), like Turkey and Mexico, may find it harder to finance those deficits. It also means that having a sizeable internal market will be even more important.
This is why companies like Burberry are an indicator of where demand is now found. The British clothing store reached £2bn in revenues for the first time, driven by double-digit sales growth in China and other parts of Asia.
Even though companies like Burberry serve the higher end of the market, they are an indicator of the growth of the new middle class. For instance, despite Chinese exports falling in June at their fastest pace since the global crisis began, and imports also unexpectedly declining, imports of consumer goods rose by 8% relative to a year ago.
In other words, it was imports of raw materials and intermediate goods that went into investment and production which fell. But goods for domestic consumption rose.
Such demand is mostly found in big emerging markets like China and India with their billion-plus populations, but also in Indonesia and Brazil with their 200-million-plus populations. The US, in fact, is the only rich country whose 310 million population places it among the top five countries in terms of size in the world.
Smaller emerging economies dependent on trade will find it harder, particularly those parts of Asia that sell to America and those parts of emerging Europe that sell to Western Europe.
Of course, the key is whether the middle class is borrowing too much to consume. This is why it can still go catastrophically wrong.
As many of these developing countries are still under-banked and rely on cash, the debt problem is more corporate than personal. For instance, private credit extended by banks is just 25% of GDP in Indonesia, 47% in India, and 52% in Brazil. But it is still worth worrying about as a banking crisis would certainly derail growth.
If emerging economies can grow at 6% as forecast by the IMF, then the Fund estimates the world economy will resume growing again at 4% by the end of next year, while the advanced economies could reach 2%.
It would be a good pace, but slower than the heady days of the 2000s. And a more sustainable pace would have a better chance of lasting.