Will Emerging Markets Enter into a Global Recession?
By admin September 1, 2015

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The great fall of China and its twenty-first century success story came to a great surprise for many people last week. More importantly, the country’s economic slowdown may perhaps signal the next global recession, impacting developing countries and emerging markets the hardest.

The first downturn occurred nearly seven years ago, due largely to contractions in the world’s largest economy, which slapped nearly every advanced market, from Europe to Japan, and left a global economy still recovering today.

Now seven years later, the second largest contributor to global growth, particularly in emerging markets, may be dragging the global economy into another round of stagnant growth and declining expectations.

Beijing’s last-ditch attempts to ease panic through its currency devaluation last week, and the country’s desperate aim to preserve it historic 7 percent target has left many wondering, what, if exactly, is Chinese leadership doing to stimulate confidence at home and aboard.

Is it fair to call this the dangerous “R” word?

First we must begin to define what exactly constitutes a recession. A recession is typically defined by several benchmarks: high-unemployment, slowing Gross Domestic Product (GDP), and high inflation; however, a slowdown isn’t called a recession until there is a decline in GDP for two or more consecutive quarters.  But these criteria may not be helpful when examining the global economy as a whole.

Traditionally the IMF have measured global decline by global growth sinking lower than 2.5- 3 percent. It wasn’t until the “the mother of all recessions” did the IMF revise their previous understanding, and tailored its new explanation to the current Great Recession that was unlike any of its predecessor.

Today we define a global recession by a decline in real per-capita world GDP, taking into account indicators such as capital flows, trade, oil consumption, industrial production and unemployment. So how are we certain China may be heading for rough times? According to Citigroup Inc.’s top economist, Willem Buiter, China’s slow response may be what slides the world from recovery to recession. For Buiter, China’s actual rate of expansion is closer to a realistic 4.5 percent, or maybe even lower.

 “They will respond but they will respond too late to avoid a recession, he said, “which is likely to drag the global economy with it down to a global growth rate below 2% – which is in my definition a global recession.”

How will this global recession impact emerging markets?

Developing countries are left most vulnerable to China’s handling of it slowdown. Oftentimes, they are the factories supplying China’s manufacturing industries and home to China’s insatiable demand for natural resources. The Wall Street Journal warned “Outside of China, overall growth in the emerging world has fallen below 2%, implying that for the first time since the crises of the late 1990s and early 2000s the developing countries are growing more slowly than the developed world.“


And the slowing demand in China will leave reverberating affects across many regions around the world, as trade weakens and investment disappears.  Emerging market currencies, for instance, have already taken a nosedive as countries main commodities across the world have all tanked. Coupled with a rising dollar, and an expected increase in Fed interest rates, this will have many developing countries revaluating its finance for the upcoming year. Most of them will be unable to pay back debt in a currency they now can’t afford, with countries soon to be making less on their exports and loosing more to pay back their dollar denominated debt.

This is only a brief introduction to what is occurring today, but as each week presents more bad news, the world is watching as China is falling. Perhaps it’s a wake-up call for Beijing and its partners that were along for the ride to foster a more sustainable approach to growth and development.

For more information:

Is China About to Plunge the World into Recession?

Emerging-Market Currencies Battered by Commodities Slide, China Turbulence

What has gone wrong for emerging markets?

China’s road to recovery brings emerging market turmoil

The Great Fall of China

How Brazil’s China-Driven Commodities Boom Went Bust

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