LISBON, March 24 (Reuters) - No matter how Cyprus's financial drama ends, its troubles show yet again that rich countries enfeebled by the great financial crisis remain a weak link in the world economy.
By comparison, emerging markets are not only looking
stronger but are also contributing more consistently to global
growth.
At worst, if Cyprus has to abandon the euro, fragmentation
of the single-currency bloc would chill investment and could
reduce trend growth in the euro zone’s four major economies by a
full percentage point on average in the period 2015-2020,
according to economists at Bank of America Merrill Lynch.
Under that scenario, trend growth in Germany could fall to
zero, they said.
Even if a solution is found that keeps the tiny
Mediterranean island afloat, the inept handling of the crisis
has revived political risk. Confidence in the euro zone economy,
already relapsing after a fairly bright start to the year, can
only suffer.
Several banks lowered their forecasts for the bloc on the
heels of grim purchasing managers’ surveys, and a clutch of
sentiment indicators and money supply figures this week are
likely to further underscore the economy’s precarious position.
While policy makers in the euro zone struggle to keep the
single currency together, the leaders of Brazil, Russia, India,
China and South Africa (BRICS) will meet to strengthen the
foundations of emerging markets’ growth.
The summit, to be held in Durban, South Africa, on Tuesday
and Wednesday, is expected to give the go-ahead for a joint
foreign exchange reserves pool as well as an infrastructure
bank.
The initiative is being hatched partly out of frustration
with international financial institutions that they judge to
primarily reflect the interests of industrialised countries.
Jim O’Neill, the chairman of Goldman Sachs Asset Management,
noted that, for all the havoc that Cyprus can potentially cause,
its annual output of $22 billion is no more than China produces
in a week.
“For the Cyprus fiasco week to be followed by a BRICS summit
week sums up the changing fortunes of global economic
development,” O’Neill, who coined the BRICS acronym in 2001,
said.
SOURCE OF STRENGTH
Portugal, mired in recession due to austerity measures
demanded by international lenders, provides a vivid illustration
of the growing importance of emerging markets.
The number of Brazilians visiting Portugal has been growing
by double digits for more than five years, according to
Francisco Calheiros, president of the Portuguese Tourism
Confederation.
Sales to China from Volkswagen’s factory outside Lisbon, the
country’s second-largest exporter, jumped 54 percent in 2012
even though the plant’s total output fell 15 percent.
Angola is now Portugal’s fourth-largest market, accounting
for 6.6 percent of its exports – more than the United States.
“This is how we’ve been able to grow our exports, which is
the only component in our GDP which is going up,” said Joao
Leite, an economist with Banco Carregosa in Lisbon.
Global figures illustrate the relative vigour of developing
countries.
Trade in goods between advanced economies is down by 6
percent over the past four years whereas trade among emerging
markets is up by 38 percent, according to Ebrahim Rahbari and
Deimante Kupciuniene, economists at Citi.
“Trade transformation towards emerging markets has a long
way to go,” they said in a report.
AMERICA’S WARY EYE ON EMERGING MARKETS
A stronger net export performance is one reason why the
United States grew modestly in the fourth quarter 2012 after a
preliminary report that the economy shrank.
Thursday’s final revision for gross domestic product for the
October-December period is likely to show a 0.5 percent rate of
growth, according to economists polled by Reuters.
Among the week’s other data highlights, U.S. durable goods
orders and personal income are both expected to have rebounded
in February from a swoon in January induced in part by an
increase in payroll taxes.
The debate in the United States on whether free trade is to
blame for the stagnation of middle-class incomes and rising
inequality is likely to heat up as talks over transatlantic and
transpacific market-opening deals gather momentum.
In a study for the Peterson Institute for International
Economics in Washington, Lawrence Edwards and Robert Lawrence
acknowledge that some of the public’s fears are well founded
because free trade can cause short-term job losses that put
communities under strain.
But they conclude that rapid growth in emerging markets is
part of the solution to America’s problems, not their source,
because a rising tide lifts all boats.
“Developing country growth has therefore contributed toward
faster U.S. export growth, an increase in the variety of imports
available to Americans, and higher terms of trade associated
with any given trade balance,” they wrote.
