Fisher Investments Editorial Staff
Emerging Markets

Country Matters

By, 12/14/2009

Story highlights:

  • While Americans are biased toward their own country, the US isn't leading the world out of recession—and doesn't have to for global growth to continue.
  • Emerging markets are leading the way. China, in particular, has grown markedly in 2009 and looks set to continue in 2010.
  • The Chinese economy has pockets of strength and weakness, but data points to overall strength.

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Assumptions of domestic superiority extend beyond rooting for the home team in the impending Winter Olympics: Most folks think their own country more important than it is, in all areas. Take the economy. America's the largest economy, so Americans (and most of the world, frankly) tend to assume world growth hinges on the US. But the US is only 23% of the world's GDP—big, but far from the major determinant of global economic direction. While the US seems to have decidedly re-entered growth mode, recovery is being led not by the US or even other developed nations, but emerging markets—about 31% of the world—particularly China.

China—the world's third largest economy—is projected to grow 8.5% in 2009. The latest economic releases beat expectations in some areas and missed in others, but overall, signs point to continued strength in 2010. For example, though loan growth in the back half of 2009 was down relative to the first half, it still exceeded expectations by nearly 40 billion yuan. Looking ahead, reports suggest loan quotas will reset to 6 to 7 trillion yuan. Though this is lower than 2009's anticipated 9.7 trillion yuan total, it is still far ahead of 2008's 4.9 trillion yuan haul. Mandating some tightening in lending is consistent with the government's larger moves to pare back recent economic stimulus. But the overall increase since 2008 still means plenty of capital flowing through the economy…which is a positive.

Infrastructure investment has been strong all year, with the latest data showing continued growth in the government's fixed asset investments (FAI)—though November's rate was less than expected. Looking ahead, the government implied they will invest less in new infrastructure projects in 2010, so FAI growth may slow further. However, any fears of a huge drop in infrastructure buildouts—one of the primary drivers of demand growth throughout the entire developing world—are overblown. After all, current infrastructure projects will continue; only the number of new projects will drop. Keep in mind, this will likely mean FAI growth rates drop—but down from a previously gangbusters rate. Infrastructure buildouts will hardly stagnate.

This bodes well for future industrial production and electricity generation, which are surging ahead of expectations. As these areas are tied largely to infrastructure buildouts, their growth should behave similarly: Up absolutely, though the rate may drop a tad. Industrial production and electricity generation are also driven by home and auto sales. These remained strong in October and November, helping retail sales fall less than they otherwise would have. The retail sales results are still disappointing, but it's just one month's data. Monthly data always wobbles short-term—it's not indicative of longer term trends. 

Finally, money supply continued its steady growth, signaling CPI could grow more quickly over the months ahead. This has prompted speculation the government may tighten monetary policy to fight future inflation—central banks globally are tasked with balancing growth and inflation, and China is no different. However, any monetary tightening likely won't happen until exports normalize and rates can tighten without hurting domestic employment. In other words, the government still seems focused on supporting growth rather than combating inflation. Besides, for now, increased CPI just means the country isn't suffering deflation—a good thing.

Overall, the Chinese economy has pockets of strength and weakness. But the sum of the parts looks very good overall. As growth continues in China and throughout developing countries, developed nations should see steadily improving global economic health.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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