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Emerging Markets Mock the Pessimists

Jim O'Neill worked for Goldman Sachs Group Inc. from 1995 until 2013, serving most recently as chairman of Goldman Sachs Asset Management, and as the firm's chief economist from 2001 to 2011. Before joining Goldman Sachs, he was head of global research at Swiss Bank Corp.
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Remember how this time last year a lot of analysts were predicting that 2014 would be a bad year for emerging markets? Didn't really happen, did it? Now I hear economists saying the reckoning they'd expected has only been postponed. It'll happen next year instead. It's possible, but I wouldn't bet on it.

In this discussion, one crucial fact is both obvious and usually forgotten: The so-called emerging markets are all quite different. They don't move in unison. Take the impact of cheaper oil. Just as in the advanced economies, it's good news for some (the equivalent of a tax cut) and bad news for others (the equivalent of a cut in income). It's unhelpful to generalize. Many of the world's star performers in 2014 were emerging-market economies. The same will be true in 2015.

The fallacy of agglomeration is compounded by a failure to grasp relative scales. Taken together, the two errors give a distorted picture of global activity.

The slowing of China's expansion is a constant theme these days. Yes, but remember that China will be a $10 trillion economy by the end of 2014; that during the course of this year's slowdown, it added roughly $1 trillion to world output; and that slowing growth in China is still quite rapid by most countries' standards. Adjusted for purchasing power, China's economy is now about as big as the U.S.: Growing at the supposedly disappointing rate of 7.0 to 7.5 percent, it's adding more than twice as much to global output as the U.S.

China's Economic Data

Yet the median financial commentator is excited about the U.S. and downbeat about China. What am I missing?

In current-dollar terms, China's economy is now twice the size of Japan's. Again, investors seem more energized by the smaller case. Japan would have to grow at a rate in excess of 10 percent to make a bigger contribution to global output than China. Or look at Europe. China is bigger than Germany, France and Italy combined: The biggest euro economies would need to grow by more than 7 percent to rival its addition to global activity. In other words, a sense of proportion would be good.

China's "weak" growth isn't the only encouraging global indicator. India too is on the way to becoming a globally significant economy. It's already about the same size as Italy, or three-quarters the size of the U.K. economy, in current-dollar terms. Adjusted for differences in purchasing power, its addition to global output will far exceed theirs in 2014.

In fact, despite the general mood of despondency, growth in global output will come in this year at about the same rate as in 2012 and 2013 -- 3.3 percent. Granted, that's down from an average of 3.9 percent over the past decade, but it's about the same as in each of the two decades before that. The main thing, in any event, is that U.S. growth isn't the only force driving the pattern.

Financial markets seem to give a better sense of the underlying dynamics than you'd get from gauging the mood of analysts. Slowing China has seen its Shanghai benchmark index rise by roughly 30 percent so far this year. The Shenzhen index, which probably gives a better representation of the modern sector of China's economy, is up about 35 percent. That's roughly the same as the rise in India's main stock market index. Indonesia is up about 20 percent, and Turkey 25 percent. A number of other developing-country stock markets have done a lot better than those in the advanced economies. Not so much a crisis, when you look at those numbers; more a pretty stellar year.

So is 2015 when it finally all unravels? The now-traditional end-of-year prediction calls for a steep rise in U.S. bond yields. If that happens, and it could, then emerging-market economies with growing current-account deficits and a correspondingly heavy dependence on imported capital might struggle. But bear in mind two offsetting factors.

First, some of the economies seen as most at risk in this scenario -- including India and Indonesia -- are oil importers  and will benefit from cheaper oil.

Second, advanced-economy central banks have limited latitude -- and in some cases, none -- to tighten monetary policy and raise long-term yields.

In Japan and the euro area, further easing seems likelier than any tightening of monetary conditions. The U.S. has halted its quantitative easing program but will be in no hurry to advance its schedule for monetary tightening. There's little prospect yet that the Federal Reserve will put the bonds it has bought back into the market. And for the time being it won't see higher global bond yields as serving U.S. interests: U.S. exporters, after all, need customers.

It's enough to make you think the crisis may be postponed yet again.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the editor on this story:
Clive Crook at ccrook5@bloomberg.net