The Great Rotation

Economic downturn or simply evolution, the fabric of the global economy is about to change as East takes on West for world dominance.

Like an old car, there's only so many times you can pump money into a broken economy before you concede and move on. As central bankers of the West inject billions into propping their respective economies up, the global scale is tipping towards China-led eastern dominance.

HSBC today released their quarterly Emerging Markets Index (January 10^th) revealing a recurring trend that we all knew about, but didn’t expect to see so soon. "We are moving away from a US- or Europe-led world to a world led by China," Stephen King, HSBC’s chief economist noted, coining the move as 'The Great Rotation'.

The term has become common parlance among economic commentators of late: most recently used to describe the bonfire of government bonds in favour of equities (a fascinating story in itself, but not one for today). In this case, Mr King is pointing not just to a new superpower, but to the emergence of a new super region, which could significantly disturb the current status quo.

The fall of the Western Empire

Europe is the epitome of the 'broken car' metaphor. The Reliant Robin economies of Spain, Greece, Portugal and Italy are barely being propped up by the tired Volkswagens and Renaults of the North, with little help coming from the functional and isolated Bentley. But the mechanics are running out of ideas, and it's only a matter of time before the next check up ends with the advice: "have you considered a Hyundai?"

What's particularly unnerving about the current state of the West is that after spending several years observing the eurozone crisis with disguised contempt, the US has started to implement a frightfully similar response to their own fiscal problems. The Economist whimsically describes this transition as 'can-kicking' turning into a transatlantic sport.  

Where do we stand?

But what does this mean for Britain? Well, ever since our naval prowess became permanently stationed in the Thames and our Empire crumbled we have resorted to 'dog and master' tactics, prudently attaching ourselves to our biggest ally with 'special bond' rhetoric and military bargaining. But the US is not the ally it once was, which means it may be time to start (excuse me) humping a different leg.

China has more influence over emerging markets, which means that as well as growing domestically, it also has close ties to other growth spots. George Osborne might be a tool, but he's not daft, and he has been working rigorously to make the UK a major trading centre for China's currency, the renminbi, in an effort to more closely align the UK with the next great superpower. For the UK, this is crucial.

“Global economies, particularly emerging markets, are driven more and more by the new world, which is exemplified by Chinese strength and contribution to global growth,” Murat Ulgen, HSBC’s chief economist for central and eastern Europe and sub-Saharan Africa in a phone call with Bloomberg.

Way forward

While the US has a GDP of over $15 trillion compared to China's $7 trillion, GDP growth in the East stands at over nine per cent while the US languishes at under two. What's more the US deficit stands at 8.6 per cent while China enjoys a comfortable 1.1 per cent.

China's emergence as a new superpower is beyond doubt, its growth supported by neighbours  Indonesia and India, who are all expected to be in the world's four largest economies by 2050 alongside the US and Japan in number five. The PricewaterhouseCooper study found that E7 economies (China, India, Brazil, Russia, Indonesia, Mexico and Turkey) will by 2050 be around 25 per cent larger than the current G7 when measured in dollar terms at market exchange rates (MER), or around 75 per cent larger in purchasing power parity terms.

What we can hope is that the emergence of the East simply adds a new dynamic to global economics, the creation of a Global village if you like. It's no surprise that China has started to unfold as the world's next superpower and has developed its own gravitational pull of emerging economies at its periphery. But this could simply be the establishment of a new parity, a representation of globalisation, with no political strings attached.

You may say I'm a dreamer.

By Jack Peat