Chart of the day: GDP growth and volatility
Alan Taylor has one of those op-eds today which is crying out for a chart. He’s comparing DMs, developed markets, to EMs, emerging markets*:
A central macroeconomic indicator, gross domestic product growth and its volatility, speaks to the reversal of fortune. Circa 1970, EMs exhibited high mean and high variance relative to DMs; but after 1980 this risk-reward combination evaporated as EMs suffered a lost decade. But from the 1990s EM growth picked up and volatility moderated; DM growth slowed and, after the crisis, volatility spiked.
What does this look like in graphical form? Here’s the chart, which is taken from a recent Morgan Stanley research report:
As with any chart where time isn’t on the x-axis, this is very interesting and also takes a little time to fully comprehend. Basically, if you look at the DM line — that’s the dark blue one, representing developed economies — you see average growth rates declining steadily all the way from 1980 through the present day. That was something we accepted during the Great Moderation, kidding ourselves that even though we weren’t growing as fast as the emerging world, at least we were growing with very low volatility.
Then the crisis hit, and GDP volatility hit levels unprecedented in recent economic history, at least in the developed world, with standard deviations moving up towards 3 percentage points.
Meanwhile, the emerging world has a much higher mean growth rate — around 9%, compared to the developed world’s 3.5% or so — which has been rising steadily in recent years even as volatility in that growth rate has declined towards developed-world levels. Emerging-market GDP volatility isn’t yet lower than developed-world GDP volatility, but it’s close. And given the tiny difference in volatility, the enormous gap in absolute size is all the more striking.
This chart, in a nutshell, explains why American companies are all falling over themselves to make inroads in China, and other emerging markets. They’ve had strong growth for a while, but now they’re pretty stable, too. Here’s Taylor, again:
What would have been your reaction, circa 2006, to someone peddling the following forecast? There would soon erupt the worst, synchronised global financial crisis in 80 years, or possibly ever. World trade would start to collapse as fast as in 1929-31. Many developed markets (DMs) would experience deep recessions, the costliest banking crisis ever and would stagger toward fiscal calamity. But – guess what! – emerging markets (EMs), after a brief panic, would sail on unscathed. They would have no significant crises: currencies, banks and fiscal positions would retain stability. A two-track recovery would take EM growth on to a trajectory away from a troubling slump in the DM world.
That world might not have seemed likely five years ago. But it’s the world we’re living in today. And it’s the base case scenario for the foreseeable future, too.
*Update: In response to inboulder, in the comments, here’s the list of the countries used, from page 11 of the PDF:
List of EM countries and ISO codes: Taiwan (TWN), India (IND), Indonesia (IDN), Korea (KOR), Malaysia (MYS), China (CHN), Singapore (SGP), Hong Kong (HKG), Thailand (THA), Brazil (BRA), Mexico (MEX), Peru (PER), Colombia (COL), Argentina (ARG), Venezuela (VEN), Chile (CHL), Russia (RUS), Poland (POL), Czech Republic (CZE), Hungary (HUN), Romania (ROU), Ukraine (UKR), Turkey (TUR), Israel (ISR), SA (ZAF).
List of DM countries and ISO codes: United States of America (USA), Germany (DEU), France (FRA), Italy (ITA), Spain (ESP), Japan (JPN), United Kingdom (GBR), Canada (CAN), Sweden (SWE), Australia (AUS), New Zealand (NZL), Austria (AUT), Belgium (BEL), Denmark (DNK), Finland (FIN), Greece (GRC), Iceland (ISL), Ireland (IRL), Luxemburg (LUX), Netherlands (NLD), Norway (NOR), Portugal (PRT), Switzerland (CHE).