There’s a lot of attention being paid towards the Euro area these days. With Greece on the brink of financial ruin the world’s eyes are turned to the old continent. Europe is an interconnected house of cards and the fear is that Greece’s fall in economic growth will cause the rest of the dominoes to tumble with her.
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Europe is fighting a crisis and is seeing stagnant economic growth with growing concern that the entire continent might suffer from deflation for the next decade. Deflation occurs when inflation is negative meaning that prices are actually getting cheaper. This is not optimal because when deflation occurs people tend to put off purchases for later, figuring: “well, I’ll just wait to buy that LCD TV until the price goes down even further”. This means there’s less money in the system and as a result deflation tends to choke off growth in economies that are consumer-driven.
Europe seems to be stuck in quicksand…are there any countries that are the opposite? Which countries are likely to see growth in the next decade?
Let’s take a look.
Economic Growth in China
Ten years from now, (barring some unforeseen dramatic event) China will be as large as the U.S. economy. China has been a remarkable economic growth story over the last 15 years which has transformed the nation. It’s become a major world player. China is now the biggest export market for many parts of the world and the biggest source of imports as well.
In the 30 years leading up to 2011, China had an average annual growth rate of 10.2%. Since then China has “slowed down” and only averages about 7.5% growth in GDP a year. Most economic watchdogs and organizations expect China to slow even further, with growth reaching 4% by 2025.
But remember, these are still extremely healthy numbers and China’s GDP today is about $9 trillion – half that of the U.S. And bigger than Germany, France and Italy combined.
The challenge for the Chinese will be how they develop the Renminbi, the Chinese currency, alongside the dollar. Will the Chinese RMB supplant the dollar? Will China continue to impose tight control on their currency?
Only time will tell.
Economic Growth in Mexico
The BRIC countries, Brazil, Russia, India and China were once touted as future economic powerhouses but barring China, the BRIC countries have largely failed to inspire.
Instead, Mexico is a country that seems to be firing on all cylinders.
Brazil and Mexico grew very similarly over the 90’s, following which Brazil benefited from a commodity-led boom. The game-changer: massive demand from China for commodities which boosted the Brazilian economy. Now Brazil is struggling.
On the Mexican side, the country is the third largest in terms of U.S. imports. China may be number 1 in terms of U.S. imports but that share is stabilizing while Mexico’s is on the rise. Mexico now produces more cars for the U.S. than Canada does. Given the close proximity to the U.S. it is easy to see how Mexico’s growth is tied to the U.S.
Mexico is also making the move up the value chain. While countries like Brazil rely on their natural advantage in commodities: items like sugarcane, cotton or soybeans, Mexico is preparing for a future in manufacturing.
The country has two positive factors in its favour. The first: as China grows, labor costs will grow with it – making Mexico a more attractive place for other countries to set up manufacturing businesses. Secondly, Mexico is already attracting high-value manufacturing such as aerospace which is high cost and capital intensive.
With all these positives, economists expect Mexico to overtake Brazil by 2022.
Economic Growth in the Philippines
The Philippine economy is expected to grow an average of 6-7% over the next decade. This upbeat outlook combines well with the reform-minded government looking to crack down on corruption, improve the country’s infrastructure and the overall business environment.
Emerging economies have to contend with currency fluctuation risks to economic growth. As their currencies move against the dollar, investors often pull money out of these countries so as to invest in “safer” U.S. holdings. One way to counter that is to have lots of money in reserves, to buttress the outflow of capital when your currency fluctuates versus the dollar.
And that’s exactly what the Philippines have. With gross international reserves of nearly $80 billion, the South East Asian economy is sitting pretty.
That’s not all. In 2013, for the first time in its history, Philippines received an “investment-grade” status from world-renowned rating agencies such as Standard & Poor’s. In fact, recently, Standard & Poor’s actually upgraded Philippines to just above-investment grade. This will definitely help the country attract the capital it needs to spur future growth.
While in the past the Philippines has been a bit of a laggard, growth looks to really take off in the next decade. Economists at the HIS forecast that the Southeast Asian nation can become of the top three economies by 2030 and that the Philippine economy will more than double by that time.
There you have it. Three countries that are expected to be economic-growth super stars over the next decade. China, Mexico and the Philippines are all ones to look out for in the next ten years. As an investor, it’s always good to diversify away from a purely U.S. portfolio and because international equities tend to outperform when the U.S. underperforms (meaning it is a good hedge) it may be a good idea to put some money aside to invest in these emerging economies.
Think about it!
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