Just when we thought we were free of monetary crisis, we get pulled back into one; this time it is the emerging markets. Ten years after the US housing bubble collapse and six years after Greece dragged the Euro zone to the brink, a third installment in the emerging markets is unfolding. This bust will hit harder than people expect, weakening the world economy even as the US Fed, threatens to raise interest rates.
This cycle began with capital flooding across borders in search of disappearing yield. Bubbles turned to busts, the flow changed directions, flowing from rich markets to poorer ones. Debt in the emerging markets has risen 150% of GDP in 2009 to 195% presently. Slower growth in China and weak commodity markets, along with the approach of higher rates in the US sets the world up for a sobering horizon. The coming reckoning will hurt three groups: The prolonged hangovers, such as South Korea and Singapore with enormous current account surpluses, that are kicking the can up the road. All this saps growth and puts off the threat of a severe crisis; the imprudent borrowers which lack the means to bail out their sufferers. Brazil, Malaysia, Turkey rely on foreign capital, have high debt to income ratios, high current account deficits, high inflation and foreign denominated debts. It is important not to overstate the gloom. Nominal wages in the US have just begun to rise at a healthy rate. Europe is having its best year of growth since 2011. Europe’s open economy is most exposed to the cooling emerging world. The US has a more acute problem: The divergence in US domestic monetary policy and that of the rest of the world. The fear is that any Upward pressure on the dollar, will hurt exports and hurt earnings. Waves of capital will invariably seek out the American consumer as the borrower of last resort.
The Euro Zone has been reporting underwhelming GDP growth of late. Germany grew at 1.8%, but its quarterly rate slowed, while France narrowly beat expectations and growth in Italy continued to slow. The Euro hit a seven-month low against the dollar and the yen on the hope that the ECB will introduce more stimulus. More easing would highlight the economy’s divergence with the US, which is promising a rise in rates.
China’s home price index rose for the time in more than a year. New home prices increased by a mere 0.1%, but at least it was upward. This ends a 13 month of steady dropping prices. This seems to be good news but the improvements in the economy are lopsided, in favor of State Owned Enterprises.
Japan, the other Asian powerhouse returned to recession when its economy sank by an annualized 0.8%, a much deeper contraction than the 0.2% that was expected. With China slow growing and low oil prices could prompt further stimulus.