World Bank Says Developing Countries Driving Global Growth

Posted on January 25, 2011 by americancentury

6 Votes

During the recent Great Recession, developing countries such as China and India played a key role in sustaining global economic growth, while developed economies struggled to cope with issues such as the subprime market meltdown, sovereign debt issues, and soaring unemployment numbers. In the coming years, developing nations will continue to play an increasingly important role in driving the global economy. In the meantime, however, global economic growth will moderate in 2011 as it moves from a recovery phase following the rebound from the economic crisis and should pick up more steam in 2012, with developing nations shouldering almost half of global growth. According to the recently released 2011 Global Economic Prospects report from the World Bank, global GDP (gross domestic product) growth, which reached 3.9% last year, will decline slightly to 3.3% in 2011 and 3.6% in 2012, with developing economies outperforming developed ones (see table below). GDP is the total monetary value of all goods and services produced domestically by a country. We also note that the International Monetary Fund growth forecastused by many economistsof 4.3% in 2011 is based on a different methodology that uses purchasing power parity. Using this method, the World Banks global growth forecast for 2011 would be 4.1% and 4.4% for 2012.1 The Global Outlook in Summary: Real GDP Growth* (%) 2010(e) 3.9 World 2.8 Developed Countries Eurozone 1.7 Japan 4.4 United States 2.8 7.0 Developing countries East Asia and Pacific 9.3 China 10.0 Europe and Central 4.7 Asia Russia 3.8

2011(f) 3.3 2.4 1.4 1.8 2.8 6.0 8.0 8.7 4.0 4.2

2012(f) 3.6 2.7 2.0 2.0 2.9 6.1 7.8 8.4 4.2 4.0

Latin America and Caribbean Brazil Mexico Middle East and North Africa South Asia India**

5.7 7.6 5.2 3.3 8.7 9.2

4.0 4.4 3.6 4.3 7.7 8.5

4.0 4.3 3.8 4.4 8.1 8.7

*Aggregate growth rates calculated using constant 2005 dollars GDP weights. **Reported on a fiscal year basis. (e) = Estimate (f) = Forecast Source: World Bank

Driven by growing domestic consumption and rising commodity prices and exports, the GDP growth of developing nations is projected to grow by 6% this year and 6.1% next year, outperforming growth in rich developed economies, which are forecast to achieve 2.4% growth in 2011 and 2.7% in 2012, according to the World Bank. Slower Growth for China As Chinas role in the world economy becomes increasingly more important, we believe that the need to create and implement effective social and economic policies is essential. The big decline in Chinese exports during the Great Recession, which led to the layoff of millions of factory workers, underscores the importance for China to implement a more balanced growth structure. In order to maintain high growth rates and social peace, Chinas leaders face a delicate balancing act of transforming the countrys economic engine from one that is dependent on exports to one that is driven by domestic consumption. During this economic transformation, China will nevertheless remain the main driver of global growth even as its GDP growth shifts into a lower gear from 10% in 2010 to 8.7% in 2011 and 8.4% next year. In our view, growing domestic consumption in developing countries like China, which has a population of 1.3 billion people, will generate enormous opportunities globally by creating jobs, expanding trade, and creating new investment opportunities. India Also Benefiting from Robust Domestic Consumption Like China, India, which is among the fastest growing economies in the world, is also benefiting from robust domestic demand. The report pegs Indias GDP growth at 8.5% this year and 8.7% in 2012. In India, there is a large and growing middle class of several hundred million citizens with rising discretionary income. Accordingly, foreign and domestic investment is on the rise in power generation, telecommunications, ports, roads, petroleum exploration, and processing and mining. In our view, this should open the door to many investment opportunities in the coming years. High Unemployment Remains a Drag on the U.S. Economy Unfortunately, the low growth projected for developed nations like the U.S. will not have much of an impact in reducing high unemploymentwhich came in at 9.4% in December despite an uptick in hiring in the manufacturing sectorand improved capacity utilization. In

the U.S., although shoppers returned to the malls in full force this past holiday season, high unemployment and a weak housing market will temper GDP growth, which is projected to grow 2.8% in 2011 and 2.9% next year. Turning to Europe, GDP growth in the eurozone is projected to grow by a paltry 1.4% this year and 2% next year. During this time frame, modest growth is expected in larger European Union countries such as Germany, which should help absorb excess capacity and create employment opportunities for workers in the region. Strong exports to China and other Asian economies have helped drive growth of 3.6% in Germany last yearthe strongest rate recorded since East and West Germany were reunified in 1991.2 Despite cooling off somewhat from what the World Bank calls a post-crisis bounce-back phase of the recovery to slower but steadier growth, investors should note that developing economies will far outpace the uneven recovery seen in the developed world. Moreover, we believe that in recent years developing nationsdriven by a growing middle class with purchasing powerhave implemented sound economic policies and management practices that have made the emerging markets asset class more appealing. Nevertheless, rising inflation (especially food prices) resulting from volatile capital inflows remains a growing concern. American Century Investments offers a wide variety of stock, bond, asset allocation and money market funds. Visit americancentury.com for more information: Individual Investors | U.S Investment Professionals
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World Bank Sees Developing Nations Driving Growth, Jan. 12, 2011, The Wall Street Journal. 2 German Economy Steams Ahead, Jan. 13, 2011, The Wall Street Journal. Investment return and principal value will fluctuate, and it is possible to lose money by investing. International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks. The opinions expressed are those of American Century Investments and are no guarantee of the future performance of any American Century Investments portfolio. This information is not intended to serve as investment advice; it is for educational purposes only. You should consider a funds investment objectives, risks, and charges and expenses carefully before you invest. The funds prospectus or summary prospectus, contains this and other information about the fund, and should be read carefully before investing. Investments are subject to market risk.