The World Economy Is Up! No, Down!

How to Choose Where to Take Your Franchise in 2014

Recent world business headlines have swung from euphoria on the growth of the world’s economy to mild panic that the world is falling down. “Global growth is now projected to be slightly higher in 2014, at around 3.7 percent, rising to 3.9 percent in 2015”, according to the World Economic Outlook (WEO) Update: “Is the Tide Rising?”, January 2014. This source goes on to say, “In some economies, there is a need to manage vulnerabilities associated with weakening credit quality and larger capital outflows.”

There is new pessimism about the BRICS countries: Brazil, Russia, India, China and South Africa. Latin America’s growth has fallen from about 6% in 2010 to about 2.5% in 2013. Some sources ask if the BRICS are in a midlife crisis. In fact three of the BRICS – Brazil, India and South Africa – are being called part of the ‘Fragile Five” with the other two countries being Turkey and Indonesia. (Source: World Economic Forum blog by Nouriel Roubini, January 24, 2014.)

There has been a significant fall in currencies of Turkey, Brazil, South Africa, India and Russian against the dollar in recent days. “Argentina woes weigh on EM currencies”, Financial Times, January 24, 2014.

Why are these emerging markets seeing declines? Is this caused by internal economic problems? Not exactly. Russia has seen a dramatic fall in foreign direct investment (FDI) due to rule of law challenges. Brazil has seen a fall in FDI due to protectionist government policies and the extremely difficult requirements to start up new businesses in the country. South Africa has real wage and union challenges, and the central bank controls payment in hard currency. Argentina, Venezuela South, both have huge inflation and a currency that is set against the dollar at an unrealistic level. Turkey is in the 12th year of the AK Party running everything and its leaders are seeing internal problems that are not good for FDI.

China seems to be cooling off in the manufacturing sector, which means less imports of commodities from various BRICS countries. But there is evidence that the central government is working hard to turn a government sector economy into a consumer driven economy. China remains a great market to sell into. Consumer wages are increasing dramatically, as is the discretionary income of the middle class consumer. India, despite the pending elections and bureaucracy, remains a country with over 250 million middle class consumers who desire western products and services and can pay for them. But it is absolutely critical to chose the country licensees extremely carefully.

But there is general agreement that what we are seeing today is not a repeat of the 1997 Asian currency crisis. The large emerging markets are much more diverse today and their middle class consumer base is dramatically higher than is was 17 years ago. Brazil, China, India and Indonesia are now ‘Engines’ of consumer spending, not tied completely to commodity export income or the economies of the first world. With a combined middle and upper class population of more than 600 million, these countries generate a high level of consumer spending internally

So, what do franchisors seeking to sell into the BRICS+ do? I submit that you do research to find out the real cause of problems in the emerging markets and focus your efforts in 2014 on those that are least likely to interfere in their economy and most likely to welcome FDI without protectionist policies. Watch for projections of 4% or more real annual Gross Domestic Product (GDP) growth – follow ‘The Economist” magazine’s weekly analysis. The World Bank sees real economic growth and new investment when the GDP growth rate is 4% or more in a country.