In order to Ruchir Sharma, head of emerging markets and chief global strategist at Morgan Stanley Investment Management, China’s increased control over the tech sector and the possibility that US consumers will save more than they spend are twin risks to the global economic recovery.
Sharma, who is the author of best-selling books such as 2012’s The Roads of Prosperity and 2016’s The Rise and Fall of Nations, does not foresee a global collapse. But he warns that the booming consensus may be overlooking risks that could slow growth sooner than expected.
India’s chief strategist calls the twin hazards “fault lines,” a phrase that defines cracks in the lithosphere that give rise to earthquakes.
A decade ago, the expression gave its name to a classic book analyzing the post-financial crisis of 2008 economy by his countryman. Raghuran Rajan: “Fault Lines. How Hidden Cracks Still Threaten the World Economy.”
Here are excerpts from the interview with Sharma, who recently published another book, “The 10 Rules of Successful Nations”.
How do you assess the global economic recovery?
I’m a little concerned due to a very strong consensus that we should expect a big economic boom. Growth estimates are still too high. So what can go wrong is a question that bothers me, and the bond market seems to be asking the same question. There are two “fault lines” at work in this global economic boom that we need to be wary of.
What would these fault lines be?
One has to do with China. The scrutiny of the technology sector is high, and regulatory policy has a restrictive effect, as we have seen historically. The digital economy, by some estimates, now accounts for 40% of China’s GDP. That number was 10% a decade ago. I’m a little concerned — if there is repression — what the impact will be on economic growth and how far it will go. That, to me, is a big concern for global economic forecasts.
What is your other concern?
In the United States, people believe that fiscal spending will decrease and everyone thinks that’s okay because consumer conditions are good and that will be offset.
The problem is, if you look at the last time consumers had such benefits, after World War II, they ended up saving a lot of that money instead of spending it. What if the consumer ends up saving a lot of those gains like last time? At the same time, many consumers are still scared of 2008.
Do you have a deadline for the slowdown in the recovery?
I still feel the recovery still has a long way to go because as vaccination accelerates in emerging markets, their performance will improve. So I think the global recovery may not have peaked yet.
But I’m concerned that the two big engines of growth may be less robust than we thought, and that means the recovery could peak much faster than consensus expects today. I don’t anticipate a global crisis, but the consensus today is very strong that we will have a global economic boom. I’m looking for the flaws in conventional wisdom.
What would the Federal Reserve’s withdrawal of stimulus mean for emerging markets?
I believe in the old saying that history doesn’t repeat itself so quickly. A lot of people have “the fear of 2013” (when signs of the Fed stimulus pullback rocked the market), but I think the fundamentals are different. Yes, there are some emerging markets that are vulnerable, but those are the smaller frontier markets.
I would say if you look at the big emerging markets, the vulnerability is lower this time around, in terms of current account deficits and external debt situations. It’s much calmer now. I’m much more constructive today than a decade ago about emerging markets.
Why are you less concerned about emerging markets?
For me, due to the expansion of the commodity cycle and the fact that the cost of adopting new technologies has come down a lot and are being adopted very quickly in emerging markets, including some of the poorest countries. I think this makes me very optimistic about what can drive emerging market growth in the coming years.