US Weathering Tight Money Surprisingly Well, While Emerging Economies Thrive

US Weathering Tight Money Surprisingly Well, While Emerging Economies Thrive

Ira Singh
13 July’23

In a surprising turn of events, the United States has proven resilient in the face of tight monetary conditions, while several emerging economies are outperforming growth forecasts. With only a handful of countries currently in default, the global economic landscape is displaying unexpected signs of stability.

Despite concerns about the impact of tight monetary policies, the US is weathering tight money surprisingly well, but emerging economies are doing even better. Barely five are in default now, and India and Brazil are outperforming growth forecasts

Among the 25 largest emerging economies, three-quarters of those reporting data have beaten growth forecasts this year,some, including India and Brazil with wide margin. Forecasts for 2023 are rising and according to few analysts those projections,most of that uplift is from emerging economies.They expected emerging economies to be especially vulnerable to rising interest rates.That perception still rules.It is based on past crises,on the current weaknesses of China, weighed down by heavy debts and of a few smaller countries such as Ghana and Bolivia.But this picture excludes the biggest developing nations outside China, from India to Mexico which together account for half the emerging world by economic output and more than half by population, according to analysts.

The rising interest rates did trigger accross Latin America and Asia in the 1980s and 1990s,but crises forced reform.Many of the big emerging economies entered the pandemic of 2020 which repaired banking systems and heightened financial discipline.They borrowed less heavily for stimulus spending and saw deficits rise on average of 15%of GDP from 2020 to 2022,half as much as the US,a third less than developed world average,according to information.Now it,is the American story that rests on questionable foundations.The United States’ ability to weather the tightening monetary environment which may create some valuable gems but like all manias is likely to prove part hype.

While the US economy remains strong,by billions of dollars in stimulus funds that still sit in American savings account,and by financial conditions that remain much looser than the Federal Reserve would like, according to recent reports.Despite the interest rate hikes so far,the Fed has stated clearly that more hikes are to come before inflation is under control.

Recovery more sustainable

In a significant shift of economic power, emerging economies are poised to outperform their developed counterparts, with an expected average growth rate surpassing 4% this year, according to recent updates.This projection highlights a remarkable four-fold growth pace in comparison to developed nations. As a result, foreign investment in major emerging markets, including India, is on the rise, reflecting the adage that “money follows growth.”

The projected average growth rate of above 4% for emerging economies in 2023 signals a promising future. This expansionary trend not only demonstrates the resilience of these economies but also highlights their increasing importance on the global stage. Investors have taken notice, recognizing the potential for substantial returns on their investments in these dynamic markets.

Among the emerging powerhouses, India stands out as a magnet for foreign investment. With a population of over 1.3 billion people, a burgeoning middle class, and a pro-reform government, India offers an attractive business environment ripe with opportunities. Investors, eager to capitalize on the country’s immense potential, are pouring funds into various sectors such as technology,manufacturing,and renewable energy.

India, with its massive consumer market and ongoing structural reforms, has experienced a resurgence in economic activity. The government’s focus on digital innovation, infrastructure development, and foreign investments has paid off, propelling the country’s growth beyond expectations. India’s manufacturing and services sectors have been key drivers of its economic success.

Brazil, another standout performer, has managed to overcome previous challenges and emerge as a regional economic powerhouse. The country’s commitment to economic reforms, favorable business environment, and increased investor confidence have led to a robust expansion. Brazil’s diversified economy, encompassing agriculture, manufacturing, and services, has contributed to its outperformance in growth forecasts.

Additionally,the positive developments extend beyond India and Brazil. A mere five emerging economies currently find themselves in default, a remarkably low number considering the global financial climate. These countries have implemented prudent fiscal policies, strengthened their financial institutions, and attracted foreign investments to bolster their economic stability.

Moreover,by comparison having moved earlier than the Fed to raise rates,many of the key central banks in the emerging world are closer to meeting their inflation targets and to cutting rates again as per media reports.Normally inflation runs two times faster in emerging economies than in developed ones.Now excluding outliers,the median rate in emerging economies is 5%-6% no higher than in developed economies.That has not happened in the four decades.Some central banks in the developing world have started to cut rates and many others from Brazil to Indonesia are expected to follow soon,according to sources.

Though the major emerging economies are generally in good financial shape ,so far this year much of Asia is rising on the back of strong domestic demand.In Latin America,the key driver is exports, exports of commodities in particular,for which global prices have slipped a bit in recent months but are still quite high.These nations, according to media reports,are ‘decoupling’ from China.Emerging economies used to grow in lockstep with China,their meaning trade partner,but that link was weakening sharply even before the pandemic hit in early 2020.As China turned inward and developed countries sought to reduce their dependence on supplies from China,new trading opportunities opened up for other emerging economies.

Moreover,if tightening financial conditions eventually does trigger a US recession,as many still expect,it will ripple outward and stir trouble in some of them.

As the world continues to navigate the complexities of a tightening global financial environment, the unexpected strength displayed by the United States and emerging economies offers a glimmer of hope for sustained growth and stability in the global economy.