Developing Economies Unlikely to See Prior Growth with More Capital Spending, Trade

Developing economies and the businesses operating within them, particularly those in industrial production and exports, will likely face in the foreseeable future an uphill battle to realize the growth rates they enjoyed in past decades, Wells Fargo predicts. That will be the case even if robust capital spending reignited trade on a global level, the bank’s analysts said in a new report.

Global trade volumes, along with industrial production, have been mostly flat on a year-over-year basis in the June through August period, but developing economies appear to have been more negatively affected during the current economic cycle, noted Jay Bryson, global economist, and E. Harry Pershing, economic analyst, both with Wells Fargo. This trend follows a previous decade that saw developing economies benefitting at the expense of advanced economies, in part, as companies off-shored their production facilities. Between 2011 and 2015, however, industrial production in the developing world was cut in half relative to prior years, while export volumes have slowed.

The banks’ analysts believe that developing nations are more dependent on foreign trade than advanced-economy nations, which would most likely benefit more from any acceleration in global capital spending that may appear on the horizon. “Specifically, spending in the rest of the world on capital goods accounts for 2.8% of value added in advanced economies, whereas the comparable ration in developing countries is 2.2%,” Bryson and Pershing said.

Likewise, international trade in raw materials and intermediate inputs is particularly important for developing nations; 9.2% of the value added that is generated in developing economies is accounted for by final domestic demand in foreign economies, compared to 4% in advanced economies, the Wells analysts said. “In short, it appears that the developing world is more dependent on the secular forces of globalization and its positive effect on global trade volumes than are advanced economies,” they said.

– Nicholas Stern, editorial associate

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