Alert! Emerging markets

The recently published IMF World Economic Outlook (WEO) trimmed the projection of the global growth to 4 percent in 2012 from over 5 percent in 2010. The U.S and Euro zone growth rates are expected to not exceed 2 percent. The expected global growth will likely be supported by the high expected growth rates in the emerging markets such as China (9.5 percent) and India (7.75 percent). Weaker economic growth and threats of sovereign defaults in the West have increased risks to global financial stability over the past few months. The recent downgrade by rating agencies of three big US banks - Bank of America, Citigroup and Wells Fargo - has strengthened the argument of economists who believe that the world has entered into a dangerous new phase and is heading towards a global depression. According to the IMF, in the past emerging markets were somewhat resistant to these adverse developments; but now if Europe and United States fail to sort out their debt and fiscal issues, global demand can crumble. This would directly affect emerging economies, due to external imbalance which shows emerging markets dependency on the West. Thus there is an urgent need for emerging economies to shift from foreign to local demand. External rebalancing is easier said than done; and even if there is some, rebalancing economic growth is not possible without internal rebalancing in the US (shifting from fiscal stimulus to private demand) to kick start the economy. What makes things worse is that after the massive sell off on stock markets throughout the world rather than taking some policy actions to boost investors confidence, the central bankers of G20 countries released a document announcing that they are committed to retaining the stability of the banking system and financial markets, as required. Despite the apparent promises, this document is vague and offers no specifics. Leading economists believe that, in these crises, clear and directed policy actions are needed rather than broad statements expressing concerns and noble intentions. If the advanced economies cannot find a way out of the looming crisis, financial markets will weaken further. Consequently, global trade and commodity prices would decline, hauling down growth in emerging markets to the extent that the global growth would decline to levels even lower than 4 percent in 2012.