Since 2008, when the worst of the economic crisis took hold, it has been the emerging markets that many have looked to for growth. In many ways, emerging markets provided a seemingly perfect solution to the day’s problems. As economies slowed at home, cost advantages could be found by moving production to these rapidly developing manufacturing bases. As sales slowed at home, disposable income could be found in the increasingly wealthy and sizable consumer markets. Indeed, it wasn’t just those trying to find cheaper production and new consumers that sought opportunity and fresh prosperity in emerging economies. Trade between emerging markets began to skyrocket, particularly as nations rushed to fill the demand for commodities and components at the centre of the emerging markets’ plans to build, manufacture, grow, and emerge.
Over this same period, Ti has tracked the trends and forces shaping the emergence of these economies in the Agility Emerging Logistics Markets Index and its accompanying survey. As we enter 2016 and the seventh edition, we’re faced with a mix of economic headwinds, market turbulence and social and political pressures. These are pressures as yet unseen in this current era of global economics which, by now we were told, would be built on a solid foundation of BRICS.
As 2015 draws to a close, it seems ever more likely that 2016 will bring with it a third phase of the global economic turmoil we’ve all experienced since 2008. As Andy Haldane, Chief Economist at the Bank of England, explained, phase one came in 2007-2008, when banks lent too much against worthless collateral. Phase two, during 2011-2012, saw the realisation that lending in the Eurozone offered on the false assumption that all countries had equal capacity to repay, and led to massive rounds of quantitative easing. Now, phase three is beginning. Emerging markets that rode the commodity boom of the last 7 years, to prop up the world economy during its toughest decade since 1929, are starting to realise that, maybe, the seemingly insatiable thirst for components and commodities is about to dry up in the most significant market of all, China.
And that’s where the problem at the heart of this third phase lies; China’s economic slowdown. In the rush to meet demand from the world’s second largest economy, emerging markets on a global scale began to feed in commodities and raw materials that fuelled the country’s construction boom. Still others fed in components and finished products to be absorbed by the world’s manufacturing hub. If players in the post-2008 economic world have worked under a doctrine, that doctrine has been to export your way out of trouble. Riding a 2-decade wave of double digit growth in China has seen many of these emerging markets do just that, but it’s also removed any real urgency to tackle very real problems in their own economies. Now, as China slows and money presses at central banks go quiet, vulnerability and weakness are beginning to show – economies have not been diversified, trade barriers are still high and corruption has not been reduced.
The effects of China’s slowdown do not stop there – its ambitions stretch far beyond ensuring growth within its borders. Its creeping global influence stretches deep into Africa, for example, where it invests $3 for every $1 that comes from the US. African exports to China, however, peaked in 2013, and look set to suffer further from the wider slowing of demand in the Chinese market. This is significant alone, but coupled with the fact that Chinese investments had become large enough to equal major components of GDP in some African countries, an end to the supply of readily available Chinese cash may have a devastating impact.
Pinning all these troubles on China is a little misleading, however, as there are problems that emerging markets face beyond their exposure to China too, with Turkey the unfortunate exemplar of many. The country was successful in attracting manufacturers keen to produce nearer to consumer markets in Europe, but slowing global trade has put many of the jobs this created at risk. Elsewhere in its private sector, there has been significant investment, particularly in dollar-denominated markets. However, as its currency has fallen and the dollar has risen, many are increasingly unable to afford the debt. Then, of course, there are Turkey’s borders with the civil war stricken Syria and IS-controlled areas of Iraq…
Perhaps now more than ever, emerging markets are in trouble. China’s slowdown, while a significant factor in many of the problems, is really only exacerbating vulnerabilities which have been present all along. While the symptoms are visible to most – falling exports, weak currencies and tumbling commodity prices, amongst others – the causes of the third phase lie within each of the emerging markets that are suffering. In the post-Great Recession years, problems were masked and chasing value in the seemingly ceaseless good times was an excuse to put off much needed reform. But for many, these good times may now be about to draw to a grinding close. Emerging markets make up more than half of global GDP, and many lack the institutions and central banks required to deliver stimulus packages of the sort that saved the economies of Europe and the US.
What will happen? Tell us here in the 2016 Agility Emerging Logistics Markets Survey, now.
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GLOBAL SUPPLY CHAIN INTELLIGENCE (GSCi)