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Industrial
Production: 2-Speed Recovery?
BY
PETER G. HALL 
EDC Vice-President
and Chief Economist
Recent data
have many pundits hailing emerging markets as the world economy’s new
growth engine. Industrial production statistics are a key part of that
argument. Do they indeed suggest that there is a 2-speed recovery
underway, and that emerging markets are leading the charge?
The recession was not kind to industrial production – defined as
output of mining, manufacturing and utilities industries – in either
industrialized or emerging markets. On average, the decline from peak to
trough among G-7 nations was a whopping 23%. In the powerhouse BRIC-M
emerging markets, the average decline was also severe, but at 17%, was
much less so. There was a wide variety of experience in emerging
markets. India was virtually unscathed, and Mexico held its decline to a
better-than-average 11%. Brazil and Russia were just below average,
while China was hardest-hit. The collapse of industrial production was
more uniform in G-7 markets, excepting Japan’s 36% drop.
A quick perusal of the latest data shows that, while G-7 industrial
production is growing again, levels of output are still about 16% below
the pre-recession peak. In most cases, growth over the past six months
has been tepid. Again, Japan is the notable exception, sporting an
upswing almost as dramatic as its stunning freefall. However, production
levels are still well below peak, and also below the G-7 average. By
comparison, large emerging markets seem much better off. Post-collapse
growth has been much stronger, enough to pull production back to the
previous peak at the end of 2009. Russia, Brazil and Mexico are still
well below peak, but the average was buoyed by India and China.
On the surface, emerging markets look impressive. But simple math paints
a different picture. Prior to the recession, emerging market growth in
industrial production was far quicker than in developed markets. Taking
into account the relative magnitude of their declines, the mere return
to average rates of growth – which has occurred in both zones – has
naturally taken emerging markets back to peak more rapidly than their
developed counterparts. The outcome is almost what one would expect.
A further look at the sources of growth is even more revealing. All
markets are benefiting from public stimulus, but certain emerging
markets – notably China – have particularly aggressive plans. In
China’s case, fiscal measures amount to over 13% of GDP – more than
three times the average OECD package. Add in monetary measures, and
China’s stimulus grows to as much as 17% of GDP. As such, it is likely
that a good deal of China’s production rebound is tied to public
measures and less so to a standard revival of business activity, casting
some doubt on the use of the word ‘recovery’.
If this is true, then in all likelihood, the true recovery is yet to
come. Data suggest the same. A return to average growth, however
notable, only maintains the gap between actual and potential production
created by the collapse. Closing the gap suggests growth considerably
greater than average – the type of growth that normally accompanies a
recovery. As such, the future looks brighter for both developed and
emerging markets, with opportunities in the latter continuing to
outshine the rest.
The bottom line? Two-speed growth in industrial production is nothing
new, just a reversion to the pre-recession average. Today’s growth is
welcome, but data suggest better times still lie ahead. Emerging markets
will top the growth charts, but they’ll need revived Western demand to
do it.
The
views expressed here are those of the author, and not necessarily of
Export Development Canada.
©2009
EDC
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