Global economy or what people generally call it as the world economy is the economy of the world, where goods and services exchanged internationally are expressed in monetary units i.e. money. As predicted by World Economic Outlook (WEO), the global economy is on rise and is projected to grow faster in 2017 and 2018 (IMF, 2018). The reason for this is the increase in trade, industrial production and consumer confidence.
Although the forecast seems to be positive but still there are some short term and medium-term risks to the global economy. One of the major risk in the next two years is the slowdown in the emerging market economies (EMEs). Emerging markets account for almost two thirds of global GDP in purchasing power parity (PPP) terms but in the recent years, there is declining growth in EMEs and there are several causes for that which vary from country to country (Ecb.europa.eu. (2018)). The impact of this decline can be seen all across the globe. For example: China is the second largest contributor in the world economy by nominal GDP and has a huge manufacturing sector that exports goods consumed around the world. Any slowdown could have a negative impact on the GDP growth of the countries like Australia, Brazil, Canada and Indonesia that are dependent on commodity exports as demand will slow down (The Balance. (2018)). In several other economies, the slowdown has exhibited structural hindrances with respect to decreasing capital accumulation, productivity growth and unfavorable demographic trends. Declining growth in EMEs also leads to a sharp slowdown in external demand which in turn effects the countries with both sizeable trade exposures and large current account deficits. In addition to this, an orderly but widespread slowdown would reduce asset value and lower investments in the emerging markets.
All these challenges have already created a significant negative effect on global growth and with continued slowdown in the EMEs, the next two years could have a major adverse impact on the global economy affecting developing as well as developed nations
The financial turmoil in emerging market economies (EMEs) also has an adverse impact on European nations as within European nations, several countries have large exposure to EMEs. For example, Germany which is one of the largest European nations has strong trade relations with the emerging markets and is thus highly prone to the slowdown happening in these economies. The external impacts are currently negative, as growth in exports to emerging markets is continuously decreasing and is now much weaker than demand from developed economies. Thus, German companies are facing higher export risks which in turn can negatively affect their growth. For example, Germany contributes almost 29% of their total exports to emerging markets. One fifth of these exports are shipped to China, which means that Germany is more exposed to the risks generated because of the emerging markets than other European nations. (Coface.com. (2018)). The key sectors that are more prone to risks because of the slowdown in emerging markets are the automotive, mechanical and electrical sectors. In addition to this, cyclically-sensitive chemical industry is also vulnerable to the risks.
In response to the negative effects of emerging market economies on the German trade, the government is changing the growth model and is making the internal demand (private consumption sector) as the main driver for growth. Earlier private house used to spend very less and did not contribute much to GDP growth. The main reason for this was the weaker performance by Germany’s labour market in earlier times but now the private sector is rising again and there several factors causing this. Firstly, Germany’s labour market is booming. The level of employment is the highest since Germany’s reunification and the prospects are very good with labour demand climbing to all-time-highs. Germany’s healthy labour market can be linked back to legislation which has improved flexibility and increased the possibilities for part-time and temporary employment. This has, in turn, led to important first steps into full-time employment for the former unemployed. In addition, there has been an increasing need for skilled workers, due to the strong demand for German products from abroad, while labour unions and employer associations have worked cooperatively together. The healthy labour market is supporting the bargaining power of unions and growth in wages is quite dynamic. As a consequence, prospects for real income have improved significantly. In addition to this, public transfers to over 1 million refugees is also supporting private consumption. Financial obligations for projects regarding the accommodation and integration of refugees are also increasing the average demand. (Coface.com. (2018)).
Overall from a macroeconomic perspective, a robust and dynamic internal demand is playing a major role in providing shield to German economy and protecting them from external influences.Coming from a family business of
automotive spare parts in India, I can relate to how the business is affected
by the slowdown in emerging markets. India is itself an emerging market but
unlike other countries, currently India’s economy has been growing at
impressive rates. For example, slowdown in China has dropped the prices of
spare parts and it has become cheaper to import automotive parts. At the same
time, lower prices of these products are helping India to keep its current
account in check and also reduce input costs. In addition to this, “Make in
India” initiative of current Prime Minister Narendra Modi has shifted the focus
of every Indian to manufacture within the country. Thus, India’s manufacturing
sector is becoming a good option for investors who are interested in developing
markets. India is a land of 1.3 Billion
people with world’s largest youth population. The internal demand is increasing
at an exponential rate and in order to cater to this demand, a large amount of
input and finished products are required. This in turn provides internal
business opportunities and generates employment to a large number of people.
This helps in protecting India from external factors as the supply within India
can generate huge profits. We as automotive spare parts manufacturers shifted our
focus towards rural sector and are supplying quality spare parts at affordable
rate as the input cost of material procured from China decreased due to
Overall, India’s automotive
sector stands out as a relatively bright spot and is not affected by the slowdown
in emerging markets booming because of its stable macroeconomic conditions,
renewed policy momentum, and a business-friendly government