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People stroll by Lehman Brothers Holdings Inc.’s head office in Tokyo. (Katsumi Kasahara/Associated Press)
People stroll by Lehman Brothers Holdings Inc.’s head office in Tokyo. (Katsumi Kasahara/Associated Press)

The global economy’s long climb back to the new normal Add to ...

It’s not a uniform picture, of course. In India, consumer price increases are running at almost 10 per cent. But much of the world has been spared from the misery of runaway price hikes.

Spare capacity and slow growth mean central banks in Europe and North America don’t see inflation flaring up any time soon.

Given still high unemployment and weak inflationary pressures, “considerable” monetary policy support should remain in place, the OECD said this week.


Emerging markets were the beacon of hope in the post-recession years, the driver of global growth as most advanced economies flailed.

That’s flipped. The BRICs are slumping. Business and consumer confidence in Brazil is faltering, exports and weaker consumption is denting Russia’s economy, India’s currency has buckled and China’s growth has clearly decelerated from the blistering pace of prior years.

Blame America, in part. Investor capital is flowing out of emerging markets, as the prospect of higher rates make U.S. assets more attractive. That outflow has triggered a slump in emerging-market currencies, boosting market volatility and driving the rupee, Indonesia’s rupiah and Brazil’s real lower. It has also sparked talk of the possibility of a financial crisis in some countries.

The International Monetary Fund this week warned that emerging markets are now slowing more than expected, saying some risks have grown to the downside. Some economists have cut their global growth forecasts of late – citing a slowdown in markets such as China and Brazil as a chief reason.

Even with slowing growth in many markets, their economic clout remains. Emerging markets’ share of global output has grown to more than 30 per cent from 20 per cent in the early 1990s, led by growth in Asia.

CIBC World Markets economist Peter Buchanan said the flood of easy money opened a yawning and unnaturally large gap in growth between emerging economies and developed economies post-Great Recession. “Now we’re looking at a more normal gap,” he said.


The flip side of the surging U.S. dollar is the rout of emerging-market currencies.

They have become the first casualties of the looming end to easy money in the U.S.

Currencies from the Indian rupee to the Brazilian real have lost 12 to 20 per cent of their value against the U.S. dollar this year – a reversal that has already erased billions of dollars of stock market value.

Commodity-reliant currencies, such as the Canadian dollar, have also been pushed lower by the U.S. dollar strength.

Since the Great Recession, credit has been flowing from the U.S. into Brazil, India, Malaysia, South Africa, Turkey and many others, inflating stock prices and currencies.

That all stopped abruptly when the Federal Reserve signalled that it was preparing to begin phasing out years of easy money policies.

“Emerging markets have had a bonanza of capital inflows over the past couple of years,” said Mr. Brodeur of Signature Global Advisors. “Those flows have now begun to unwind. The era of free and cheap credit is over.”

Worried about capital flight, the BRIC countries (Brazil, Russia, India and China) recently announced the creation of a $100-billion reserve pool to shield their weakening currencies. They said they wanted to guard against “unintended negative spillovers.”

But the fund represents a tiny fraction of the trillions of capital now gravitating back to the U.S.


It’s a measure of Europe’s nascent recovery that the hot topic at this week’s G20 meeting in St Petersburg, Russia, wasn’t the euro crisis.

“I want to tell you, at this G20, we were no longer the focus of attention,” a relieved European Commission President Jose Manuel Barroso told reporters.

Indeed, the economic news for most advanced economies is finally looking up after five years of recession and stagnation.

Most of Europe is growing again, albeit tentatively. Japan’s economy is enjoying a good year and is expected to grow as much as 1.7 per cent this. And China’s slowdown appears to be less severe than initially thought.

Gross domestic product growth is Canada remains below potential (up an annualized 1.7 per cent in the second quarter), held back by weakening consumer spending and falling exports.

And, of course, the U.S. is expanding again, buoyed by a comeback in manufacturing and housing.

Mr. Yardeni points to factory activity surveys, such as the JP Morgan Global Manufacturing PMI, as evidence of the improving global outlook. The index rose for a 10th consecutive month in August and now sits at its highest level since January.

But experts caution that the recovery in many advanced economies remains extremely fragile, particularly in Europe and Japan.

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