As the Eurozone teeters on the precipice of financial disaster, the global economy lies in wait. Emerging markets countries in particular are acutely aware that the implications of a further slowdown in Europe could have paralyzing macroeconomic effects. The most recent crisis in 2008 put a spotlight on export-dependent countries as the reduction in global trade led to drastic levels of economic contraction.
In preparing for a potential double-dip recession, it is important to recognize which countries are most susceptible to another wave of declining global consumption. By analyzing the overall correlation between countries’ GDP and export growth since 2000, as well as the % decline in exports during the 2008 recession, we were able to create a framework for gauging country risk exposure. What we found is that countries generally fall into one of three buckets in terms of exposure, depending on the overall historical relation of export growth to GDP growth and quantity of export decline in 2008.
Some of the results may be intuitive, as geographic proximity would dictate increased levels of trade and reliance on the general economic health of the Eurozone (e.g. Russia, Ukraine).
However, some results may not be as obvious. Even though Latin America is generally viewed as well insulated and a relative safe haven for growth-seekers, Mexico’s extreme GDP and export contraction during the last financial crisis should be a cause for concern. While Mexico is now much more prepared to pursue counter-cyclical policies and in an improved competitive position on the global scale, a sharp decline in global demand could leave the economy reeling.
FSG uses this framework as one of many lenses for understanding the potential consequences of a double-dip recession. Nonetheless, it is vital to incorporate the socio-political and macroeconomic developments to more accurately depict the possible results of another crisis. Nobody has the perfect crystal ball for predicting the future, but with the right analysis, it is possible to make the crystal less opaque.