Emerging markets can give us all Christmas cheer

WITH temperatures dropping to -15C and snow making it impossible to get to shops to fill those all important stockings, it’s hard to partake in this year’s Christmas cheer. It’s even harder to be jolly after a year that promised the beginnings of great things, which never came.

But hope is the mantra for the New Year, and optimistic predictions for 2011 should give us cheer. Developed economies are expected to grind towards growth as the emerging world propels us into calmer economic waters.

Employment is expected to slowly pick up, and loose monetary policy in the West is set to thrust risky assets back on the table.

Morgan Stanley calls this new reality a “tale of two worlds”: one where emerging markets see robust development, but also where growth faces a battering in Europe and the US. In this tale of two worlds, emerging market consumers are becoming our beacon of hope. The Asian and Latin American story is pulling western companies to tap into its cash rich consumer base, while the monetary stimulus from the US is finding its home in these economies.

Also among the few morsels of hope for 2011 is that the US economy starts powering up. The great deleveraging is still on as personal savings start creeping back to levels not seen since the 1980s. The $858bn tax bill passed by Congress is expected to inject some fiscal clout into the economy. That’s hope we can take into the holiday season.

But what of the hurricanes waiting to engulf us? Moody’s estimates that US tax cuts, along with unemployment benefits, will raise the ratio of US government debt to GDP to 73 per cent. That is one of the highest the country has seen in history, and could risk its credit rating. There are also storms of equal magnitude gaining strength in the housing and municipal debt markets.

Then there is the financial tsunami already on the fringes of Europe, where bailouts are only buying time. Insolvency is beckoning some countries, and others risk sinking while saving the drowning. All that can hold back the flood waters is massive fiscal adjustment. Let’s also not forget the inflation that is waiting to take the global economy by storm.

The biggest risk we run in next year’s tale of two worlds is to allow hope to blind us in the West to the risks of gambling on a return to former glory. This global shift needs to give us hope to dream of a new world, where there is growth for one and all.

Maithreyi Seetharaman is a presenter on CNBC Europe each weekday morning on Squawk Box Europe and Capital Connection
http://europe.cnbc.com