How the Collapse of Emerging Markets Could Affect Western Businesses
By Webb Ward
Posted: 4th February 2014 08:50
Emerging markets in the world are drying up. For starters, there are less emerging markets for businesses in the West to invest in. Secondly, it is hard for emerging markets to recover when the global economy is still slumping on some level. These markets are, however, vital to the growth of economies in the West for a variety of reasons. How can the collapse of emerging markets hurt businesses in the West?
1. The Threat of Contagion
Remember what happened when Bear Stearns collapsed? The markets imploded. Fear was rampant and caused a ripple effect throughout the entire financial system. Rather than risk being contained by the bailouts and deposit guarantees, investors, whose money was bound up in heavily leveraged products, rushed to the door. Greece, Ireland, Portugal and Spain all took massive hits on their economies. So just because this collapse is currently limited to emerging markets like Argentina, Turkey and Russia doesn’t necessarily mean your pension or stock portfolio is safe. Judging by the past 5 years, that simply isn’t true. And the worry is, it’s happening again.
2. A Loss of Confidence Ensues
Even if we don’t experience widespread contagen as with the recent global financial crisis, the impact of bad news coming out of so-called growth markets is still something to worry about. And that’s the problem: fear, uncertainty and doubt are not what you need to grow an economy. Confidence has been building among the UK’s private sector with orders up and more job hires, but if uncertainty creeps back in, which it can do considering the early stage of the recovery, then businesses might hit the brakes on their plans for expansion.
3. Western Economies Begin to Contract
So if confidence slips on the back of the emerging market collapse and businesses have less confidence and are more fearful of the future, we could see the economy stagnate or worse, shrink. That’s bad enough, but don’t forget about the slight problem of debt. Debt and the sheer amount of it has been raised by Lloyds repetitively as posing an on-going and severe risk to the businesses, households and economies of the West. But don’t forget there is also significant risk exposure to lenders, such as China (11% of US public debt).
4. The Trillion Pound Gorilla in the Corner
The UK, like the US and other economies that took on debt to bail out the banking system, rely on growth to pay down the debt and balance the books. Slower growth or a return to recession will throw these plans into turmoil, dragging economies back into a mire of questioning investors uncertain if they’ll ever see their money again.