As euro zone suffers, emerging markets thrive

No matter how Cyprus's financial drama ends, its troubles show yet again that rich countries enfeebled by the great financial crisis remain a weak link in the world economy.

By comparison, emerging markets are not only looking stronger but are also contributing more consistently to global growth.

At worst, if Cyprus has to abandon the euro, fragmentation of the single-currency bloc would chill investment and could reduce trend growth in the euro zone's four major economies by a full percentage point on average in the period 2015-2020, according to economists at Bank of America Merrill Lynch.

Under that scenario, trend growth in Germany could fall to zero, they said.

Even if a solution is found that keeps the tiny Mediterranean island afloat, the inept handling of the crisis has revived political risk. Confidence in the euro zone economy, already relapsing after a fairly bright start to the year, can only suffer.

Several banks lowered their forecasts for the bloc on the heels of grim purchasing managers' surveys, and a clutch of sentiment indicators and money supply figures this week are likely to further underscore the economy's precarious position.

While policy makers in the euro zone struggle to keep the single currency together, the leaders of Brazil, Russia, India, China and South Africa (BRICS) will meet to strengthen the foundations of emerging markets' growth.

The summit, to be held in Durban, South Africa, on Tuesday and Wednesday, is expected to give the go-ahead for a joint foreign exchange reserves pool as well as an infrastructure bank.

The initiative is being hatched partly out of frustration with international financial institutions that they judge to primarily reflect the interests of industrialized countries.

Jim O'Neill, the chairman of Goldman Sachs Asset Management, noted that, for all the havoc that Cyprus can potentially cause, its annual output of $22 billion is no more than China produces in a week.

"For the Cyprus fiasco week to be followed by a BRICS summit week sums up the changing fortunes of global economic development," O'Neill, who coined the BRICS acronym in 2001, said.

SOURCE OF STRENGTH

Portugal, mired in recession due to austerity measures demanded by international lenders, provides a vivid illustration of the growing importance of emerging markets.

The number of Brazilians visiting Portugal has been growing by double digits for more than five years, according to Francisco Calheiros, president of the Portuguese Tourism Confederation.

Sales to China from Volkswagen's factory outside Lisbon, the country's second-largest exporter, jumped 54 percent in 2012 even though the plant's total output fell 15 percent.

Angola is now Portugal's fourth-largest market, accounting for 6.6 percent of its exports - more than the United States.

"This is how we've been able to grow our exports, which is the only component in our GDP which is going up," said Joao Leite, an economist with Banco Carregosa in Lisbon.

Global figures illustrate the relative vigor of developing countries.

Trade in goods between advanced economies is down by 6 percent over the past four years whereas trade among emerging markets is up by 38 percent, according to Ebrahim Rahbari and Deimante Kupciuniene, economists at Citi.

"Trade transformation towards emerging markets has a long way to go," they said in a report.

AMERICA'S WARY EYE ON EMERGING MARKETS

A stronger net export performance is one reason why the United States grew modestly in the fourth quarter 2012 after a preliminary report that the economy shrank.

Thursday's final revision for gross domestic product for the October-December period is likely to show a 0.5 percent rate of growth, according to economists polled by Reuters.

Among the week's other data highlights, U.S. durable goods orders and personal income are both expected to have rebounded in February from a swoon in January induced in part by an increase in payroll taxes.

The debate in the United States on whether free trade is to blame for the stagnation of middle-class incomes and rising inequality is likely to heat up as talks over transatlantic and transpacific market-opening deals gather momentum.

In a study for the Peterson Institute for International Economics in Washington, Lawrence Edwards and Robert Lawrence acknowledge that some of the public's fears are well founded because free trade can cause short-term job losses that put communities under strain.

But they conclude that rapid growth in emerging markets is part of the solution to America's problems, not their source, because a rising tide lifts all boats.

"Developing country growth has therefore contributed toward faster U.S. export growth, an increase in the variety of imports available to Americans, and higher terms of trade associated with any given trade balance," they wrote.

(Additional reporting by Daniel Alvarenga; editing by James Jukwey)