For some time now, the dominant story in the world economy seems to have been this: Developed economies sputtering along; emerging economies powering ahead. Now, the pendulum looks to be swinging again.
According to the OECD’s latest economic projections, released this morning in Paris, growth in a number of developed economies seems to be gaining ground, and looks to have been ahead of forecasts in the first quarter of this year. By contrast, the large emerging economies appear to be losing momentum.
That mix of news is troubling for the global economy: Over the past few years, the emerging economies have been its main engine of growth and now account for around half of global economic activity. As they start to slow, global growth could turn increasingly sluggish.
Among the OECD countries, the United States is continuing to recover while growth in Japan has rebounded strongly. In the Eurozone, six quarters – that’s a year-and-a-half – of recession has come to an end, although economies in some countries continue to contract. The United Kingdom, too, looks to be performing strongly.
Of course, this isn’t to say that the developed economies are out of the woods yet: The recovery remains tentative and risks still lurk; for example Eurozone banks are sitting on a lot of bad debt and remain short of capital. And a number of factors, including the continued hangover of the financial crisis and unfavourable long-term demographic trends, means the overall performance of developed economies will be below par for years to come. “Reforms to boost growth, rebalance the global economy and reduce structural impediments to job creation remain vital,” says the OECD.
What’s happening in the emerging economies? One issue is the threat of a return to normality in developed economies. Since the crisis struck, many OECD economies have held down interest rates at extremely low levels and have pumped money into their economies through quantitative easing. But amid strengthening signs of recovery, the U.S. the Federal Reserve, or central bank, has been signalling that it wants to begin returning to business as usual this autumn. A rise in long-term rates in the U.S., coupled with signs of recovery, has led many investors to pull out of emerging economies, which in turn is putting pressure on their currencies and raising borrowing costs.
More broadly, many of the emerging economies are now facing long-term issues that won’t stall growth but do threaten to slow it. Demographics – or ageing populations – are part of the picture as is slow momentum on reforms that could raise economic productivity. That’s not to say that we’re seeing an end to “shifting wealth” – the rebalancing of the global economy towards emerging and developing economies. But, as The Economist put it recently, “its most tumultuous phase seems to have more or less reached its end.”
OECD work on economies