Why emerging economies are slowing down

Emerging economies are slowing down.

China is by far the biggest of them, and its ups and downs have been covered extensively here.

But they are as a group experiencing weaker growth that in the recent past.

That's one of the major issues hanging over the annual meetings of the International Monetary Fund and World Bank being held in Lima.

In its latest World Economic Outlook report, the IMF forecasts that, as a group, the emerging and developing economies will register slowing growth in 2015 for the fifth consecutive year.

That forecast is 4%, the lowest since the financial crisis in 2008. In 2010 the figure was 7.5%. So what is going on?

China is a very important element of the story. It is so large that its own slowdown inevitably drags down the performance of the group collectively.

China accounts for 30% of the combined economic activity of the emerging and developing economies. Arithmetically, if China's performance changes, it is inevitably reflected in the numbers for this whole class of countries, even if there is no change anywhere else.

But China matters for another reason. It's one of the key reasons why so many others have seen their growth rates decline.

China is a leading buyer of the commodities that many other countries in this group produce - industrial raw materials such as oil, copper and iron ore, and food commodities as well.

The slowdown means that China's demand for this stuff has been weaker than it would otherwise have been. The decline in prices reflects international markets adjusting to that changing outlook.

That has affected many countries even if they have little by way of direct trade links, because the Chinese slowdown has driven down the prices of these commodities. It's not always the only factor, but copper is down by half since 2011, as is crude oil in the past 16 months.

For oil exporters specifically there is also the abundant supply currently available to buyers. It is partly down to the shale oil revolution in the US, which has greatly reduced American dependence on imports.

That has contributed to the decline in prices - along with the effect on demand coming from China's slowdown.

While most emerging economies have experienced slower growth in recent years, the IMF says the declines tended to be larger in commodity exporters.

To take some examples: Zambia, a copper producer, and Nigeria, an oil exporter, both had economic growth of about 10% in 2010. For this year the IMF forecast is more like 4% for both. Chile (also a copper miner) has slowed from 5.7% to 2.3%.

The slowdown is not just about China and commodities, however.

There is a view that the potential for emerging economies to grow has taken something of a setback. This is not something you can see in hard data. But the IMF, for example, is convinced that something is going on.

In many countries ageing populations are a factor. The IMF has also argued that the narrowing gap with the developed world means the potential for rapid gains from "catch-up" - both technological and in terms of worker's education and skills - is diminishing.

There have been improvements in the rich countries' performance, with the eurozone, for example, showing a little more life. But their recovery from the financial crisis has been persistently lacklustre.

They have not provided the "pull" in the shape of demand for emerging economies' goods that a return to pre-crisis growth would have.

The financial situation also casts a shadow for the near future in the emerging economies.

The IMF's latest Global Financial Stability Report said that "risks continue to rotate towards emerging markets".

That doesn't mean a financial crisis is imminent, but emerging economies are an increasing cause for concern.

There has been a credit boom. Private sector debt has risen especially strongly compared with past trends in China, Thailand and Turkey among others.

There is also an issue in some countries about foreign currency borrowing. It's particularly high in Hungary, Indonesia, Mexico and Chile.

It's a potential problem because if the dollar rises those debts become more expensive to repay. And there's good reason to suppose the dollar could rise.

The US Federal Reserve will sooner or later raise its interest rates from their current all-time low, and that will make dollar investments more attractive. In those circumstances investors buying dollars could push up the value of the US currency.

Indeed the mere anticipation of a US rate rise has already had the effect of strengthening the dollar as international investors have pulled funds out of emerging markets.

To take two examples, the Brazilian real fell by 39% in the past year, and Turkey's lira by 25%.

There is an upside to weaker currencies for emerging markets. It helps with competitiveness. But in addition to the effect on foreign currency debts it can boost inflation, which is already high in some.

Some of the countries concerned have their own internal problems.

Political issues, domestic and international have infected economic performance.

Brazil and Russia are two striking examples.

In the case of Russia, the conflict with Ukraine and the western sanctions that followed have hit the economy. There are also issues about the business environment which, the IMF argued, was bad for investment. The IMF was forecasting a slowdown in Russia even before it was hit by falling oil prices and sanctions.

In Brazil, there is the corruption scandal over contracts awarded by the majority state-owned oil company Petrobras. The affair has done further damage to an economy that was already vulnerable.

Perhaps the most extreme case is Venezuela, where the economy is contracting sharply - by perhaps 10% this year - and inflation is in triple digits. The government's critics put much of that down to economic mismanagement.

It's worth emphasising that the great majority of emerging economies are still growing, and by enough to ensure rising living standards. That is to say, economic activity is expanding faster than the population in most nations.

For next year, the IMF is predicting that they will manage to put an end to the pattern of slowing growth and expand somewhat more rapidly.

That said, it is the emerging economies that are displacing the developed nations as the most troubling cloud on the economic horizon.

Follow Andrew Walker on Twitter: @andrewwalker167