When Emerging Market Growth Surpasses the US

It used to be the case that when America sneezed, the rest of the world caught a cold. We could say something about the phrase “God bless America” here…but won’t.

Increasingly, however, it is newsy tidbits from abroad taking their toll on the frail financial immune system of the United States. This very day, to cite an example close at hand, a spat along the border dividing Korea’s estranged brethren and the worsening European debt infection have markets in the US a snifflin’ and a splutterin’. And that’s to say nothing of the stirring dragon over in the Middle Kingdom. The Chinese are trying to put the lid back on their own inflationary pressures by tightening monetary policy and enforcing stricter bank lending measures.

All in all, investors in the US didn’t take kindly to the news cocktail. The Dow Jones Industrial Average dropped below 11,000 during morning trading, the first time the psychological support had been breeched in over a month. The bluest chip index was down around 150 points as of this writing…and looking a tad sickly.

Gold, meanwhile, puffed up his chest and got on with the job. Predominant buying pushed the Midas metal up by as much as $26 per ounce, although a strengthening dollar mitigated its move by about $16. Net result: gold up $10 by early afternoon.

The US’s not-so-sudden role reversal, from “sneezer” to “sneezee,” should come as no surprise. The empire’s influence has been in steady, inexorable decline for the better part of the last quarter century. Whereas her mighty GDP (leaving aside the inherent problems with that measurement for the moment) accounted for almost one third of total global output in 1987, it has since shrunk to just over one quarter. By 2030, according to World Bank projections, the States will be doing well to own a one-fifth share of the total.

Revisiting 1987 for a second, that same year the US pumped out one of every three units of production on earth, the Chinese didn’t even feature among the top ten contributors. Of the so-called BRIC nations, only Brazil made the list, coming in at number 8 with a measly 2.1% share of the total. But by 2008, China had leapfrogged Brazil (and a dozen or so other countries) to take its position behind the aging, flailing Japan. And come 2030 – again, according to the World Bank – the BRICs will have collectively surpassed the US in total output, as measured by GDP.

Of course, being projections, these figures make a great many assumptions. They take for granted, for example, that current rates of expansion can be extrapolated to the end of days and beyond. Truth be told, anything can happen tomorrow…and the day after…and the day after. The Koreans might blow up the peninsular, for instance, or Bernanke might blow up the world’s “reserve” currency. We wouldn’t rule out either…or both.

Nevertheless, we do know that the world’s productive output is still growing, along with its steadily increasing population. And, in recent years at least, less and less of that growth has tended to come from the US. Instead, the emerging markets, like teenagers at a Chinese buffet, have been gobbling up the pie chart.

To be sure, the size of the many developing nations’ economies relative to those in the west is still relatively small. In order to close the gap in total production, the BRIC nations must continue growing at rates unimaginable in the west. Still, if recent history is any guide, they could well be up to the task.

In the first eight years of this decade, for example, the four BRIC nations accounted for just shy of half (46.3%) of the world’s total GDP growth. Meanwhile, the G7 nations – US, UK, Japan, Germany, France, Canada and Italy – managed to scrape together only 19.8% between them. From now through 2014, the spread between those two figures looks set to widen, with the BRIC’s share of total global growth tipping 61.3% and the G7’s share falling to just over 12%.

Again, anything could happen during the coming months and years. And, if history is any guide, it probably will.

Joel Bowman
for The Daily Reckoning