What Recession?

It is sometimes said that pundits and politicians can talk an economy into recession. Whether or not this is true, many in the West are ignoring the evidence of recovery and growth in large parts of the world because they are preoccupied with the problems of the G7.

This was one message from Jim O’Neill, the economist who coined the term ‘BRICs’ to capture the economic success story of the four leading emerging markets – Brazil, Russia, India and China.

That was in 2001 and O’Neill’s belief in these economies has been proved spectacularly right since then. Indeed, the Goldman Sachs Asset Management (GSAM) managing director and chairman (global) now says that the emerging markets will account for a larger share of global consumer spending than the USA by 2020, as part of a profound re-alignment of economic forces.

In a presentation to a select audience in the City of London which burningpants affiliate CoreData Research UK attended, O’Neill said that the consensus among many in Europe and the US that the global financial crisis has permanently impaired economic progress was not shared in Jakarta or Istanbul, let alone the main BRIC capitals.

He commented that those in the emerging markets talked about the North Atlantic crisis, not the global financial crisis and added: “At least half the world’s population does not sit around talking about the credit crisis before it has had its breakfast, but you would not believe that if you spent all your time in London, New York, or parts of Europe”.

According to GSAM, the world economy will grow at just under 5% in both 2011 and 2012, the US economy is now recovering strongly and will surprise those who have written it off, while in Europe, Germany is forging ahead and could drag the rest of the Eurozone with it, if it chooses to.

O’Neill said the debt crisis in Europe was primarily a matter of governance and leadership and pointed out that Italy’s debt to GDP ratio of around 115% has been around the same level for many years.

But his central point was the strength of the emerging markets and how understanding this is key to understanding the modern world.

China, for example, has seen its GDP go from $1.5 trillion to $6 trillion in the last decade and it is expected to grow at 8% annually for the next decade to reach $9 trillion. Its consumption of goods and services is rising and will suck in imports from around the world, which will be a powerful boost to those able to export and trade with it.

One cloud on the horizon is inflation. China could allow its currency to appreciate to control this, to both the benefit of China and other countries.

But if China fails to control inflation in the next few months, it could enter a turbulent period. Overall though, in contrast to those who talk of a world of reduced growth and painful deleveraging, the creator of the BRICs concept is bullish on the world economic picture for the next few years.