Emerging Economies to Lead Recovery

OECD: Emerging Economies Will Lead Recovery

Organization for Economic Cooperation and Development (OECD) in its Economic Outlook released yesterday confirmed what the World Bank said a few days back, that the emerging economies of China, India and Brazil (or BRIC, minus Russia) will have strong recoveries next year, while the U.S., Europe and Japan will lag.

U.S. GDP is expected to fall 2.8% rate this year, trough during the second half of this year and then grow at an anemic rate of 0.9% in 2010. Signs of recovery are not yet clearly visible in the Euro area, where the GDP is expected to contract 4.8% this year and then show 0% growth in 2010.

On the other hand, as per OECD, Chinese GDP will grow at 7.7% in 2009 and 9.3% in 2010, Brazil is expected to fall by 0.8% in 2009 and rebound to 4.0% growth in 2010, and India’s growth is expected at 5.9% in 2009 and 7.2% in 2010. Among major emerging economies Russia appears to be still ailing, with GDP expected to drop by 6.8% in 2009 and then rise by 3.7% in 2010. The recent rise in oil prices may help Russia.

However, the Secretary General of OECD reminded us that, "It’s good to have a locomotive out there pulling the train...but they can’t get us out of the hole."

Growing divergence between the growth in the emerging and the developed economies brings the decoupling theory back in vogue.

Prospects for higher growth will result in higher inflow of capital in the emerging economies. Expect the emerging market ETFs like iShares MSCI Brazil (EWZ), iPath MSCI India ETN (INP) and iShares FTSE/Xinhua China 25 (FXI) to benefit.