Growth in developing markets seems to be on a backslide so far this year, and if their slip continues, one economist says it may drag bigger nations back into recession.
According to Jay Bryson at Wells Fargo, developing economies contributions on the world stage have exploded over the last 15 years. 40% of the world’s GDP comes from developing economies, up from 20% in 2000.
Bryson took a closer look at just how important these countries are to advanced nations such as the US, Eurozone and Japan.
As of 2014, advanced economies sent around 25% of their exports to developing nations, up 17% in the past 15 years.
Beyond just exports, Bryson analysed the value added for advanced economies from spending in developing ones. Essentially, he is trying to find exactly how much spending and consumption in developing nations contributes to the growth in an advanced country.
A huge majority, 81.1%, of value added comes from domestic spending in advanced economies, but the value added from spending in developing countries has nearly doubled since 1995 from 3.4% to 6.1% in 2011.
This may not seem like a lot, but Bryson says that even with the seemingly small impact, current economic conditions in developing economies could seriously hurt their larger counterparts.
The slowdown in developing markets’ growth has been for a number of reasons. On a macro scale a stronger US dollar, decreasing commodity prices, and slowing Chinese demand are all suppressing the explosive growth from these nations. In addition, many countries have internal, country-specific issues that have cropped up.
A similar slowdown across developing economies happened in 1998 says Bryson. That year, developing economies’ GDP growth slowed by 3%. In the same year, advanced economies saw their GDP growth slow by 1%.
“A three percentage point slowdown in developing country economic growth in the coming year seems unlikely,” wrote Bryson. “However, the contribution that developing countries make to value added in advanced economies has nearly doubled since 1995, so it would not take a slowdown on the order of 1997-1998 in the developing world to have a meaningful effect on real GDP growth in advanced economies.”
Some advanced economies are more in danger than others. The US, for example, only has 3.8% of its value added from developing economies, while the Eurozone and Japan are nearly double that at 6.9% and 6.1% respectively.
Bryson says that the slowdown should seriously worry the latter two economies, “It would not take much of a shock from developing economies to cause the Eurozone and Japan to economically stall, if not slip back into a mild recession,” he wrote.
For the US, Bryson says that the economy’s relative strength should provide some buffer. “Not only does the United States have less economic exposure to the developing world than the euro area and Japan, but the American economy has more ‘cushion’ to prevent it from slipping back into recession.”
So while they may not look big, developing economies could have a huge impact.
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