This week I would like to take a step back and look at the global economy and how dramatically it has changed over the last 15 years.
The Ritesh Anand Column
Where growth is occurring and where wealth is held and has moved so radically that relying on past market experiences to determine what is important to the global economy is particularly dangerous.
The changes have implications for Africa as a whole and Zimbabwe specifically. The way we look at the global economy has fundamentally changed over the 15 years and this has important implications for policymakers.
For most of the 20th century, around 60–70% of global output and global growth were created in the developed world. Over the past decade, that composition has rapidly changed.
Today, the emerging world is responsible for 70% of the world’s growth. As a result of that growth, the composition of global output is now evenly split between developed and emerging countries. Africa’s share of global GDP has more than doubled from 1,1% to around 2,5% but remains low.
The emerging world is now responsible for the vast majority of global investment. A decade ago, 60% of global investment was still happening in the developed world, but now about two-thirds is occurring in the EM.
The pattern of commodity consumption has undergone an equally dramatic shift, with the EM now consuming about 60% of global commodities.
That shift is again largely driven by China and, to a lesser extent, by India and Indonesia. The shift that’s happened so far is more skewed toward commodities like copper that are more critical to infrastructure development. China alone now accounts for 50% of copper consumption.
US and European demand had accounted for upward of 40% of the market for many decades, but now that share has been cut in half.
Big shifts in the global composition of financial assets are also occurring (even if the shift in the composition of global markets is lagging those taking place across the global economy).
Global debt and equity markets are still dominated by developed world countries, with the US, Europe, Japan, and the UK accounting for the majority share. But emerging market financial issuance is accelerating as well. Over the past decade, the EM share of global debt has doubled (to 19%) and its share of global equity market cap has doubled (to 16%).
While China has added the most, tripling its capitalisation to become one of the world’s largest equity markets, that kind of increase is pretty typical across the EM, where (outside of Argentina and Hungary), basically every major emerging equity market has expanded its share of global market capitalisation. In global debt markets, by contrast, the shift is mostly happening because of the big increase in Chinese debt.
The EM is also continuing to accumulate wealth in the form of reserves. The shift from a world in which developed countries held 90% of global reserves has been happening for some time. It has accelerated somewhat over the past decade, and now the emerging world controls about 70% of the world’s reserves (about half of which are in China). Economies like Japan and Europe, which had been the biggest reserve holders, have seen their shares diminish.
In thinking about how the shift in global output towards the EM has accelerated, two major implications come to mind. The first is that the world has rapidly become one in which the developed and emerging countries have roughly the same impact on the global economy. The second is the degree to which the global shift toward EM economies is happening much faster than the shift toward EM markets.
The following chart illustrates this in more detail. The EM now accounts for 50% of global output, and its share across key indicators (growth, investment, commodity consumption, and reserves) has increased significantly over the last decade. Its share of global equity market capitalisation and global debt have also experienced material increases but, at this point, the EM’s share of financial markets is noticeably smaller than its share of the global economy.
These changing trends have important implications for African countries and Zimbabwe specifically.
The significant changes in commodity consumption is important as Africa seeks to exploit its vast natural resources. Zimbabwe is blessed with tremendous natural resource and its important to understand the supply and demand dynamics as well as the long term outlook for key resources. The country needs to develop the right model for the long-term development of its vast mining resources.
Emerging markets account for over 65% of global growth and any slowdown in growth in emerging markets has implications for the global economy. To a large extend the demand for commodities has been driven by strong growth in emerging markets especially China. Any slowdown in these markets is likely to have a negative impact on commodity prices.
Africa’s share of global output has increased steadily from 1,5% in the 1990 to over 2,2% today. It is considered to be the last frontier market and a source of future growth. The continent’s share of global GDP has also increased during this period driven partly by favourable commodity prices but also a growing consumer story.
Over the next two decades Africa is expected to contribute significantly to global growth but much will depend on politics, policies and commitment to long-term growth. Sadly, Zimbabwe’s share of Africa’s GDP has declined over the last 15 years from 2,7% in 1990 to less than 0,8% today.
I believe that over the next 15 years, Zimbabwe will make a significant contribution to Africa’s growth and development and account for more than 2,7% of Africa’s GDP.
The global economy is changing rapidly and it’s important for policymakers to understand the changing dynamics. Emerging markets are becoming increasingly important in the global economy and their contribution to growth cannot be underestimated. Africa should follow suit.