Amid economic slowdown, signs of new world order

Emerging markets are helping buoy global growth.

By Mark Trumbull | Staff writer of The Christian Science Monitor

from the June 2, 2008 edition

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The world economy is cooling this year thanks to a slowdown in the United States, but something new is playing out: This slowdown is serving to amplify a shift in financial power toward Asia and developing nations.

Countries such as China and India are now big enough to help guide the global economy. In the past, a sharp downshift in the US and Europe would decisively slow the rate of global growth.

This time, emerging markets appear poised to grow collectively by 6.7 percent this year, according to recent forecasts by the International Monetary Fund. As a result, the IMF sees world gross domestic product (GDP) growing 3.7 percent, even though the US might experience a recession.

The US economy remains the world's mightiest. But even for Americans, this new economic order has immediate implications:

•Policymakers at the Federal Reserve must worry about upward price pressures for food and fuel – driven largely by rising demand in developing nations. That problem calls for tighter monetary policy, while the domestic consumer slump calls for the opposite policy.

•Demand for US exports from these new markets is providing a helpful cushion for growth, yet trade tensions could be an issue in the US presidential election.

•Money from emerging markets is playing an increasingly important role in the US financial system.

"We have a new pecking order in the world economy in terms of influence on global growth and economic power," says Michael Cosgrove, an economist in Dallas. "[Historically] we would see oil prices fall with a slowdown in the US and Europe…. That no longer holds."

The dynamism of the "BRIC" bloc – Brazil, Russia, India, and China – is not new, but their stunningly rapid rise in this past decade is now being tested in the laboratory of tough times.

For consumers and workers worldwide, what's playing out is a tug of war between two opposing problems.

First is the weakness in the US and some other advanced nations as a housing slump and related credit squeeze hits households. That's dragging GDP growth down on all continents.

Second is inflation, a symptom of the strength of emerging nations. Their demand for commodities explains much of the surge in fuel and food prices worldwide. It's this problem that is, at present, taking center stage as a global worry.

"The good news here is that the standard of living for a lot of people is improving," says Mr. Cosgrove, publisher of the EconoClast newsletter. But for now, "the bad news is that it pushes up prices."

What's changed in the world economy is not just the rate of growth of countries labeled developing or emerging. It's also the size of their economic output.

"What's different this time is that the emerging market economies have been growing so rapidly that they've emerged," says Ed Yardeni, an economic forecaster at Yardeni Research in Great Neck, N.Y. "They've become very large."

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