Video: Implications of the Great Divergence

Interview of Nariman Behravesh on implications of the "Great Divergence."

Interview Transcript

What is the outlook for the world's major economies as a consequence of the "great divergence"?

Well, today's global economy can be described as the "great divergence"-or the "great divergences," we could put in the plural. And these differences, divergences, are driven by four trends.

The first is the huge plunge in oil prices that we've had that's turned the oil producers, if you will, into losers because they've lost revenues. And it's turned the oil consumers into winners because they implicitly get a tax cut, a big reduction in the amount of money that they pay for gasoline. And this is not just consumers, but it's businesses as well, like transportation, and so on. So it has created a bit of a split in terms of oil producers, oil consumers.

The second major trend, of course, has to do with growth itself in the sense that countries that have made the greatest advances in terms of reducing their debt levels and getting this crisis behind us-and the US here stands out, as does the UK-are doing fairly well. Europe and Japan are slower in terms of resolving some of these problems, so they're not growing as rapidly. And then you've got some emerging markets that are actually doing very badly-Brazil, Russia, and China even is slowing down quite considerably.

The third trend that's driving all of this is monetary policy. You've got some central banks that are going to be raising rates, primarily the Federal Reserve, maybe the Bank of England. And then others are cutting rates or providing more stimulus. And so that's creating this sort of split, if you will, in terms of the central banks.

And then last but not least is the dollar, which is, again, driven by these trends. Stronger growth in the US-expectations of higher interest rates first in the US relative to other parts of the world-has driven the dollar up, which in and of itself also creates these winners and losers. So, you've got these four trends that are beginning to push a lot of economies on to different paths as we look ahead.

What are the midterm implications of the "great divergence"?

In terms of growth rates and what this great divergence means for the relative performance of the global economy, the US growth rate is going to be very solid between 2.5 and 3% for the next couple of years. Europe probably about half that rate, maybe 1.6% in 2015, maybe a little bit better in 2016. Japan about a third that rate, about 1% this year and next year.

The real trouble comes in the emerging world. There, there are winners and losers. I refer to these sometimes as the split bricks-they're no longer one set of big unity here.

You've got Brazil in a mild recession last year, probably a deeper recession this year. Russia in serious trouble, probably contracting by about 5% this year, maybe a couple percent next year. China's slowing very considerably. In 2010, it was growing 10.5%; this year they'll be lucky to get 6.5%. The government has lowered the growth rate, the target growth rate, but they'll be very lucky to get that. And then India, on the other hand, is doing fairly well. India, ironically, will grow faster than China for the next few years.

So you've got, again, this sort of different paths, divergences we keep calling them. But you do have very different performances across the world.

Nariman Behravesh is Chief Economist, IHS