Emerging Economies to Lead Global Economic Growth

Emerging markets, not mature economies, will drive global financial growth in years to come, concludes a new report by the McKinsey Global Institute (registration required).

Countries in Asia, Latin America and other developing regions got soaked last year as housing and credit bubbles in the U.S. and Western Europe popped. China took the biggest bath, with a $2.4 trillion decline in total financial assets. Rounding out the top 10 biggest losers were Russia ($800 billion decline); India ($600 billion); Brazil, Saudi Arabia and South Korea ($200 billion); and Israel, Malaysia, South Africa and the United Arab Emirates ($100 billion). In all, emerging economy financial assets fell by $5 trillion in 2008, showing that the perils of globalization can be as great as the benefits.

Yet these developing economies are coming back stronger than their more industrialized kin. Equity markets in emerging Asian nations are up more than 30 percent since the end of 2008, while those in Latin America have risen more than 40 percent, McKinsey notes. In China, Indonesia, Singapore and South Korea, for instance, GDP in the second quarter grew at an average annual rate of more than 10 percent.

As the capital markets in mature economies expand more slowly, restrained in part by heavy government debt, emerging economies will experience faster growth. The result -- an altered global financial landscape. Says McKinsey:

Beyond the short-term recovery, the long-term fundamental drivers of financial market growth remain strong in developing economies. Many have high national saving rates, creating large sources of capital to invest. They typically have very large infrastructure investment needs that require financing. And their financial markets today are much smaller relative to GDP than those in mature markets, suggesting ample room for growth.