Economic trends

Emerging markets will get an unexpected boost – from Europe

A turnaround in the giant European economy is likely to have a significant effect on the rest of the world

It is now widely expected that the world economy will accelerate for the second year running in 2014. What is less recognised is that Europe is the ‘swing factor’ behind this.

After two years of contraction, the euro area is likely to grow around 1.3 per cent in 2014. That’s a positive swing of 1.7 percentage points from last year’s contraction.

The 18-country euro area is almost as big as the US economy, and its USD13 trillion of annual output equals 17 per cent of the global total. A sharp turnaround in this giant economic and currency bloc is thus likely to have a significant effect on the rest of the world.

For emerging markets, Europe’s revival is particularly welcome because it is being led by domestic demand. As a result, economies across Asia, Africa, the Middle East and Latin America that count the euro area as one of their main export markets are likely to be among the biggest beneficiaries.

The improvement in Europe’s outlook was scarcely anticipated only two years ago, when the euro area came close to collapsing. A deft move in 2012 by the European Central Bank under the newly appointed President Mario Draghi, who promised to provide emergency funding to any euro-area government facing problems selling debt, brought the region back from the brink.

Although the legitimacy of the so-called Outright Monetary Transactions – the bond-buying plan unveiled by Draghi to provide cash-strapped governments with emergency funding – is being questioned, the move has had the desired impact: the region has shaken off its extreme pessimism, business confidence is gradually returning, and sovereign bond yields are easing back to normal.

Domestic demand in the euro area is on the rise again

The good news for emerging-market exporters is that domestic demand in the euro area is on the rise again, as investment picks up, consumer spending rises and the decline in government spending ends – and, in some countries, reverses.

Among the larger euro-area economies, Germany’s growth prospects look best. Real wages should recover and employment is rising. Investment is growing after a prolonged decline and should accelerate through 2015, the squeeze on government finances is easing, and higher immigration and the eventual introduction of a minimum wage should boost consumer spending. A bounce in German domestic demand should shrink the country’s current account surplus, the excess in its exports of goods and services over imports.

France and Italy pulled out of recession in 2013 and the reform agenda is gaining more traction here. Meanwhile, the euro-area peripheral economies are reporting falling unemployment; import demand should pick up as these economies emerge from deep recession, capping current account surpluses.

Europe’s nascent revival comes at an opportune time for emerging markets. Since the global financial crisis of 2008-09, these economies have relied on domestic consumption, government and private investment, and trade with other emerging markets to fuel growth as recessions in the US and Europe dragged exports lower.

The impact is likely to be felt in countries as far-flung as India, Singapore, Brazil and Nigeria

As consumption starts to power the euro-area recovery, the impact is likely to be felt in countries as far-flung as India, Singapore, Brazil and Nigeria. These four economies, along with Algeria and Turkey, are among the top 10 non-European exporters to the euro area. These economies also have more exposure to the euro area than to the US.

 

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