In the aftermath of the 2008 financial crisis, the world economy suffered from anemic and uncertain growth in the OECD countries. The debate on government spending obscured consistent, if lacklustre, private sector growth in the U.S., while the euro area slid into another recession barely two years after the crisis. To insulate their domestic economies, many emerging markets embarked on sizeable credit-led stimulus and domestic demand responded strongly. At the same time, aggressive quantitative easing by the U.S. Federal Reserve contributed to a weaker U.S. dollar and low debt yields across the globe.
None of these three major forces were sustainable indefinitely; by 2013, many emerging market economies were slowing, as policy-makers sought to prevent overheating and withdraw credit stimulus. Fiscal-spending negotiations didn’t tip the U.S. into a recession, and the euro area economy began to mend, following significant structural reforms and progress toward a banking union. As a testament to its confidence in ongoing U.S. expansion, the Federal Reserve began to signal its intention of tapering its quantitative easing operations. At this point, the markets’ reappraisal of growth prospects in the emerging markets and globally began in earnest.
Is the world economy, where OECD growth pick-up is widespread and further deceleration in China relatively limited, likely to be on firmer footing than we have seen in the past three or four years? What is the outlook for the U.S. dollar? Stronger growth in the U.S. has been associated with rising current account deficits since the early 1980s, but is this pattern likely to be repeated? The ongoing structural shift in the unconventional energy supply is already manifesting itself. It is hardly coincidental that many emerging-market currencies bore the brunt of adjustment in May 2013, just when the U.S. Department of Energy announced conditional approval of a second liquefied natural gas export terminal. What are the implications of stronger U.S. dollar and firmer growth in the OECD on economic outlook in the emerging markets? How can plan sponsors participate in the emerging market growth? These are the questions plan sponsors need to think about as they assess the changing sources of global growth and consider the implications for asset allocation across and within countries.
Olga Pomerantz is an economist with William Blair & Company.