Recent data have many pundits hailing emerging markets as the world economy’s new growth engine. Industrial production statistics are a key part of that argument.
Recent data have many pundits hailing emerging markets as the world economy’s new growth engine. Industrial production statistics are a key part of that argument. Do they indeed suggest that there is a 2-speed recovery underway, and that emerging markets are leading the charge?
The recession was not kind to industrial production – defined as output of mining, manufacturing and utilities industries – in either industrialized or emerging markets. On average, the decline from peak to trough among G-7 nations was a whopping 23%. In the powerhouse BRIC-M emerging markets, the average decline was also severe, but at 17%, was much less so. There was a wide variety of experience in emerging markets. India was virtually unscathed, and Mexico held its decline to a better-than-average 11%. Brazil and Russia were just below average, while China was hardest-hit. The collapse of industrial production was more uniform in G-7 markets, excepting Japan’s 36% drop.
A quick perusal of the latest data shows that, while G-7 industrial production is growing again, levels of output are still about 16% below the pre-recession peak. In most cases, growth over the past six months has been tepid. Again, Japan is the notable exception, sporting an upswing almost as dramatic as its stunning freefall. However, production levels are still well below peak, and also below the G-7 average. By comparison, large emerging markets seem much better off. Post-collapse growth has been much stronger, enough to pull production back to the previous peak at the end of 2009. Russia, Brazil and Mexico are still well below peak, but the average was buoyed by India and China.
On the surface, emerging markets look impressive. But simple math paints a different picture. Prior to the recession, emerging market growth in industrial production was far quicker than in developed markets. Taking into account the relative magnitude of their declines, the mere return to average rates of growth – which has occurred in both zones – has naturally taken emerging markets back to peak more rapidly than their developed counterparts. The outcome is almost what one would expect.
A further look at the sources of growth is even more revealing. All markets are benefiting from public stimulus, but certain emerging markets – notably China – have particularly aggressive plans. In China’s case, fiscal measures amount to over 13% of GDP – more than three times the average OECD package. Add in monetary measures, and China’s stimulus grows to as much as 17% of GDP. As such, it is likely that a good deal of China’s production rebound is tied to public measures and less so to a standard revival of business activity, casting some doubt on the use of the word ‘recovery’.
If this is true, then in all likelihood, the true recovery is yet to come. Data suggest the same. A return to average growth, however notable, only maintains the gap between actual and potential production created by the collapse. Closing the gap suggests growth considerably greater than average – the type of growth that normally accompanies a recovery. As such, the future looks brighter for both developed and emerging markets, with opportunities in the latter continuing to outshine the rest.
The bottom line? Two-speed growth in industrial production is nothing new, just a reversion to the pre-recession average. Today’s growth is welcome, but data suggest better times still lie ahead. Emerging markets will top the growth charts, but they’ll need revived Western demand to do it.
