Trends that are shaping the future Global rebalancing

Global rebalancing

The size of emerging markets has grown to the point where they are key drivers of the global economy, as shown in the chart. This has some big benefits, but also creates imbalances that need correcting. The benefits are manifold. Emerging economies are an ever-bigger source of global economic growth, at a time when many developed economies are stagnating. Rising levels of GDP per capita in previously poor countries can lift millions of people out of poverty. Healthy GDP growth has also improved emerging economies’ debt-to-GDP ratios - an important measure of their creditworthiness - to the extent that government bonds in many emerging economies are now considered safer than those in developed economies in the eurozone periphery. The increasing number and size of emerging equities and bond markets - a corollary of economic development - creates new opportunities for investors.

  Emerging markets share of world GDP and global equities market capitalization (%)

Emerging markets share of world GDP and global equities market capitalization (%)

Source: IMF und RIMES

The overriding imbalance lies in the trade and financial flows between emerging and developed markets. Broadly speaking, developed economies are buying more from emerging markets than they are selling to them. These politically charged trade deficits, such as the US’s trade deficit with China, reflect the higher levels of consumer spending in developed economies, both in absolute terms and as a share of GDP. Rebalancing will probably require developed economies to become less reliant on domestic consumption and more reliant on exports, while emerging economies do the opposite. This may entail the strengthening of emerging market currencies, as discussed in the next theme, ‘Asian currency flexibility’.