Just catching our breath
July 23, 2012

Last week China reported its slowest growth in three years, India recently recorded its weakest performance since 2004. Foreign investments into China and India have dipped, property prices have sunk and the IMF recently downgraded India and China’s growth forecasts. Have the stalwarts that drove the global economy began to catch their breath?

While many attribute the slowdown to  the inevitability of global forces, others believe it is the beginning of the worse to come. With doomsdayers already saying that the world’s economy is in worse shape than 2009, when it weathered the brutal financial crisis, many are bracing for the worst. Manufacturing, China’s backbone economy is at one of its lowest points due to Europe’s sovereign-debt crisis. Further, European banks which had been conduits for foreign money flowing into emerging markets. Now they are pulling back as they grapple with the problems at home.

The question is, are emerging market economies such as India and China prepared to deal with a sustained lull and can they continue to tug the world economy from her doldrums? Analysts from the rich world expect so. The IMF still reckons developing economies will grow by 5.6 percent this year. Further, with a change of guard in both India and China in the near future, policy makers aren’t frazzled about pulling through. The outgoing government needs to make its mark and so will not advocate retrograde policies, while the new government won’t want to shake things up too much in the beginning, allowing both China and India enough time to grow.

Most importantly, the fragilities that made emerging economies so susceptible to crisis in the past are now largely absent. Banks have more capital and rely less on fickle wholesale funding than their European peers. Fixed exchange rates were once the rule for developing countries. They were a way to keep down inflation, but they also encouraged excessive borrowing in foreign currencies, creating strains that eventually broke the currency peg. With inflation under much better control, floating exchange rates (China is a big exception) and well-stocked foreign-exchange reserves now dominate in the emerging world, providing protection against falling exports and flighty foreign investors.

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