Emerging markets in the driver’s seat: HSBC

There has been some talk that emerging markets represent a new asset bubble, with runaway growth fueled by government stimulus which cannot be sustained.

Despite fears the that global monetary tightening will begin in the emerging markets, the economic growth rate for the group will far surpass that of developed nations, according to a report from HSBC.

The gross domestic product of emerging markets as a cohort is expected grow by 6.2% in 2010, the bank says, while growth in the developed world will be limited to about 1.9%. HSBC Emerging Markets Index data for the Q4 of 2009 showed manufacturing and services output growing at the fastest rate since the final quarter of 2007.

Last year marked a shift in world economic power, the bank says. No longer do decisions made in Western Europe and the U.S. dictate the pace of global growth. As the world shook off the recession, it was the emerging markets that led the way.

“We have reached a tipping point in global economic affairs,” says Stephen King, HSBC’s chief economist. “No longer is it possible to argue convincingly that the U.S. or European nations determine the agenda for the world economy as a whole. 2009 will surely go down as the year when we both uncovered the scale of the crisis in the developed world and celebrated the resilience of much of the emerging world in the face of what appeared to be a perfect economic storm.”

As has been the case in the late 2000s, China will remain the primary driver of economic growth in emerging markets. In reaction to the global recession, Beijing embarked on additional infrastructure projects. The result was felt across the Pacific, with the Canadian economy benefiting from sustained demand for commodities.

Traditionally, commodity prices are beaten down at the beginning of a recession, as spending is slashed by businesses. But the spending power of China supported historically high prices for materials.

Canada was not alone in benefiting from this however. Many emerging markets continue to rely on resource extraction as the basis of their economy, and demand from China — the so-called “South-South” trade — allowed these economies to withstand the economic tempest that battered the developed world.

The Chinese government has since shifted its spending priorities to social welfare programs, in an effort to stimulate domestic consumption, according to the HSBC report.

The downside of this development could be an inflationary surge throughout the emerging markets. While many eyes are focused on interest rate policy from the U.S. Federal Reserve, the emerging markets are more likely to make rate decisions independently.

“The centre of economic gravity is shifting from West to East,” says Michael Geoghegan, chief executive of HSBC Holdings. “For HSBC, Asia represents our greatest opportunity with nowhere more strategically important than China.”

(01/29/10)