Geographical Seepage in the World Economy

I was listening to a talk by Stephen King from HSBC a few weeks ago and he mentioned the idea of geographical seepage as it relates to the current state of the world economy.

Geographical seepage has occurred because many countries that didn’t have banking and housing booms and were really not part of the financial crisis are now suffering economically because of the spread of the global downturn.

Seepage is partly due to the changing structure of the world economy arising from outsourcing

The share of industrial production in GDP in BRIC nations such as China has been rising rapidly - indeed more and more industrial production takes place in emerging markets. So when demand for new cars, iPods and other electronic goods dries up from the richer nations the BRIC nations see a dramatic fall in export growth.

Credit crisis has also led to a drying up on capital flows into developing countries - one consequence is that some emerging markets find it really hard to get hold of the bank loans needed to finance their expansion.

Both developed and developing countries will be left with huge amounts of spare capacity - the global output gap might be as high as 8 or 9 per cent in 2010.

This matters for the inflationary or deflationary risks facing the world economy as we head into 2010