Non-OECD economies will drive growth - Praxis
Non-OECD economies will drive growth

Non-OECD economies will drive growth

Developing economies could contribute about 60% of global GDP growth over the next five years, as a slowdown in China will be offset by South and Southeast Asia

Emerging markets are predicted to drive the bulk of global growth. The Economic Intelligence Unit (EIU) has forecast that non-OECD economies will contribute about 60% of global GDP growth over the next five years, with a slowdown in China’s economy offset by stronger contributions from South and Southeast Asia, among other regions. Supply-chain restructuring and global investment in resources that are critical to future industries and the green transition will create opportunities for developing economies such as India, Vietnam, Indonesia, Mexico and Poland.

FDI flows to China forecast to fall sharply

Recent data indicates a significant cooling of global investors towards China. The second quarter of 2023 witnessed the lowest foreign direct investment (FDI) inflows into China since the late 1990s. Overall, China’s share of FDI inflows among emerging markets is forecast to fall to less than 30% by 2027, compared with a historic range of 40-50%.

This decline, which began in earnest in 2022, has pushed China’s net direct investment flows into the red. Furthermore, a deficit in China’s net portfolio flows has emerged, with foreign sell-offs of domestic debt securities becoming more pronounced. This trend, while observable across many emerging markets during a period of global monetary tightening, has been particularly stark in China.

The rising economic weight of emerging markets points to a shift in global power, although the US, aided by its network of alliances and the limited appeal of its major geopolitical rivals, will retain its predominant influence.

So, which countries stand to gain as China cools?

  • India: As supply-chain restructuring and global investments in resources critical to future industries and the green transition gain momentum, India stands out as a prime beneficiary. Its vast market, burgeoning tech sector, and strategic location make it an attractive destination for investors.
  • Vietnam:The country has emerged as a cost-efficient alternative to China. The country offers competitive labour costs, stable politics, and increasingly liberalised trade and investment policies. The U.S. curbs on chip exports to China have prompted companies to consider relocating some of their chipmaking capabilities. Vietnam, has been identified as a potential destination for these shifts. The country has attracted significant investments in the semiconductor sector, with major chipmakers setting up shop.
  • Indonesia: With its rich natural resources and strategic position in Southeast Asia, Indonesia is well-placed to attract investments, especially in sectors like manufacturing and digital services.
  • Mexico: As firms revisit their supply chain strategies, Mexico, with its proximity to the US and robust manufacturing base, is set to gain significantly.
  • Poland: Located at the heart of Europe and boasting a skilled workforce, Poland is emerging as a hub for tech investments and manufacturing.

But India is not a default destination

Nevertheless, it would wrong to expect India to be a default investment destination to pick up China’s slack. Despite the country immense potential India is historically known for its complex bureaucratic processes, which can delay business operations and deter investors. While there have been reforms, the pace and consistency of these changes remain a concern.

While India has a vast labour pool, there’s a significant skill gap, especially in advanced industries. Training and retaining skilled labour can be a challenge. Rapid industrialisation without adequate environmental safeguards can lead to environmental degradation, which in turn can result in regulatory crackdowns or public opposition.

Geopolitics to drive economic outlook

Geopolitics will continue to influence the economic outlook The Russia-Ukraine conflict is expected to remain unresolved throughout at least 2023-24 but become steadily less intense. However, fresh escalation (for example if Ukraine’s counter-offensive leads to scaled-up military clashes, or if domestic political instability pushes Russia towards even more extreme tactics) would once again upset the global outlook.

China-US tensions will permeate deeper into different sectors and geographies, even if the worst-case scenario of conflict erupting over Taiwan is unlikely. Yet even absent major escalation, geopolitical risk will encourage firms to revisit approaches to their supply chains and target markets, influenced and increasingly cajoled by government policy.

Fragmentation and regionalisation will be trends in politics and policymaking The passage of the worst of the cost-of-living crisis will ease some short-term pressures on policymakers, but the austerity measures now required to repair public finances and insulate governments from higher borrowing costs will be unpopular.

An increasingly insular world

Political support for moderate, liberal policies will remain weak and economic policymaking will generally push in a more insular direction, to the disadvantage of international co-operation on critical climate and technology issues. The 2024 US presidential election is set to highlight political and cultural division in that country, whereas politics is moving towards the right in Europe in response to economic and migration pressures.

Challenge to authoritarianism

Authoritarian regimes will face challenges of their own, and governance in many parts of the world will remain challenged from threats ranging from climate change to terrorism. Waning interest in China is realigning capital flows Global investors are cooling on China As noted above, a combination of the pandemic, slowing GDP growth, regulatory uncertainty and strained international relations has caused a slump in foreign direct investment (FDI) inflows to China. In the second quarter of 2023 such inflows were the lowest since China began compiling balance-of-payment data in the late 1990s, extending a strong downward shift that began in 2022.

Weak FDI has pushed net direct investment flows firmly into negative territory. A deficit has also emerged in China’s net portfolio flows, reflecting foreign sell-offs of domestic debt securities – a trend that is observable across many emerging markets during a period of global monetary tightening, but withdrawals from China have still been larger than elsewhere.

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