As the industrialized world slides toward possible recession, could still-booming developing nations come to its aid? Can China save America?
For the first time, though, developing countries – now accounting for more than half of global economic growth – could probably ride out the storm afflicting richer nations.
"China is not going to save the world," says Jonathan Anderson, chief economist at UBS Bank in Hong Kong. "But it is part of a very different picture. The US, Europe, and Japan will go in one direction, and the developing world will carry on."
And if the emerging markets do keep growing during a developed-world slump, economists note, they could at least cushion the blow for others. They will continue to import the industrial machinery that US and other advanced nations make and will still have an appetite for raw materials such as oil and minerals from the Middle East, Africa, and Latin America.
Since China, Russia, India, and Brazil, the main emerging markets, account for only about $6 trillion of gross domestic product (GDP) – compared with $32 trillion in the US, Europe, and Japan – the developing countries' continued growth can only "cushion the US decline in a modest way," says Arthur Kroeber, head of the Dragonomics economic consultancy in Beijing.
America still holds the key to much of what happens in the world economy this year, economists say. Other countries are already ratcheting down their growth forecasts because of headwinds facing the world's largest consuming nation.
Falling stock prices a worry
At the same time, many financial analysts fear that the subprime mortgage crisis has yet to fully unravel, and that banks worldwide could see their balance sheets weakened, linking much of the global economy in a slowdown.
"The strength of emerging economies is in some ways self-sustaining," says Ed Yardeni, president of Yardeni Research in Great Neck, N.Y. But "a recession in US could ... interact with the credit crisis to become something really awful."
One sign of worry about global financial "contagion" is the performance of stock prices: Shares in banks outside the US have fared worse than US banks themselves over the past three months, and stock markets in emerging nations, Europe, and Japan have all fallen even harder than Wall Street.
When they met in Tokyo last weekend, however, finance ministers from the world's largest economies, the Group of Seven, said "emerging-market economies are forecast to continue robust, if slower, growth."
Developing countries have the edge for a couple of reasons. They are playing catch-up to richer nations, and many of them have benefited from boom times for commodities such as oil. In the process, they have come into their own as global economic forces.
From Bahrain to Brazil, people are busy building bridges, information networks, even whole cities. They are selling goods and services to one another, not just to Americans. And they are buying more products than ever from advanced nations – a boon to now-struggling economies like the US.
In China, for example, the real engines of growth are not the export factories selling the world clothes and computers, though that visible sector has fueled a $260 billion annual trade surplus. "The lion's share of Chinese GDP growth is domestic, and not a function of the international economy", says Daniel Rosen, head of the New York-based China Strategic Advisory consultancy.
Past global downturns have not slowed China
Even if Chinese exporters take a hit, previous trade slumps have had practically no ripple effect on the Chinese economy, points out Mr. Kroeber. This time, he predicts, "there is no question China will lose a little GDP growth in the export sector, but they will gain some back in investment."
China's race to build more roads, railways, homes, and factories contributed most to its 11.4 percent GDP growth last year, and that boom is set to continue, or even gather steam, says Kroeber, pointing to official plans to triple investment in railroads this year.
Even if falling exports of Chinese consumer goods to America and Europe cut 2 percentage points off last year's growth rate – a common prediction – "the fact that China is not tanking will be a comfort" to economic planners elsewhere, says Mr. Rosen.
It will also mean that China will continue to import raw materials and high-technology machinery. "In the commodities field, China will be very important and, at the margins, it will certainly help the US and Europe," says Paul Cavey, chief China economist for Macquarie Capital Securities.
A historic shift
The biggest implications are for the developing countries themselves. China and India are relatively immune to trade shocks. And with Brazil and Russia exporting commodities whose prices Chinese demand is expected to keep high, "the emerging market bloc suddenly starts to look much stronger going into a slowdown," says Mr. Anderson.
"That's unusual," he adds. In past recessions, he recalls, "trouble brewing in the big industrialized economies spelled trouble in the developing world. This time, we are not looking at that."