Emerging markets will not save the world if the West slides back into recession. In an interconnected global economy, decoupling is a beguiling myth.

As fears mount that the developed world is shifting from slow growth to no growth, emerging markets seem to many economists better placed to weather the storm than they were during the great financial crisis of 2008/2009.

That is not universally true. India is hamstrung by high government debt and inflation. Turkey's yawning current account deficit leaves it vulnerable to an outflow of capital. Brazil is slowing under the weight of lower spending by middle-class consumers hit by rising interest rates.

The resilience displayed by the likes of China and Indonesia is evidence of a secular shift in the global economy from North to South, from West to East, rather than a substitute for zero or negative growth in the West.

Morgan Stanley estimates emerging markets will generate 80 percent of global gross domestic product growth in 2011-2012.

For Bill Belchere, global economist at Mirae Asset Securities in Hong Kong, Asia is finally reaping the benefits of policies to nurture home-grown demand. With incomes across much of the continent now rising faster in the countryside than in towns, millions of peasant farmers are suddenly able to afford a motorbike and a mobile phone and perhaps set up their own small businesses.

What we're seeing is new poles of domestic growth in the larger economies. No one is totally insulated in a globalize economy, but the dynamic that is developing here is under-appreciated outside Asia, Belchere said.

Rob Subbaraman, chief Asian economist at Nomura in Hong Kong, said the region would run into headwinds from slower exports to the United States, Europe and Japan. But he too pointed to Asia's reduced reliance on external demand. In China, for example, net exports subtracted from GDP growth in the first half of the year.

The size of China's economy will be close to $7 trillion this year, up from $4.5 trillion as recently as 2008, so this is a shift that matters. China's own demand has quickly become an important driver of growth in the rest of Asia; it is no longer just an assembly hub for the region, Subbaraman said.

EYES ON CHINA, ASIA

Fitch on Tuesday cited the increased importance of Asia as one reason why the economic outlook in sub-Saharan Africa is brighter than it has been in many decades; as trade with Asia remained buoyant, Africa was less exposed than in the past to what happens in advanced countries, the ratings agency said.

Still, China would not be unscathed if the rich world fell into recession, and reduced demand for its exports would have a knock-on effect on commodity prices and producers. This was the main factor behind a cut in Morgan Stanley's projection of 2012 GDP growth in Latin America, announced on Thursday, to 3.6 percent from 4.6 percent.

We are wondering what's going to happen with China right now, said Pedro Mariani Lacerda, the head of Horto, a financial consultancy and investment fund in Rio de Janeiro, said of Brazil's economic prospects.

A clear worry is that while the economic fundamentals look better in many emerging economies than they did in 2008, policy makers generally have less leeway. India is especially constrained: the general government deficit has more than doubled since 2007 and wholesale inflation exceeds 9 percent. [ID:nL3E7JG1I5]

The government and central bank, which has raised interest rates 11 times since March 2010, are still forecasting growth of at least 8 percent in the financial year that began in April. The Australian bank Westpac said in a report that the arithmetic for sustaining such a brisk clip has become more than a little daunting.

China has more scope to ease if need be despite its own inflation headaches and worries about bad debts in the banking system. Cutting banks' required reserves, now at an eye-popping 21.5 percent, is a ready option, but the government, which is targeting a budget deficit of 2 percent of GDP this year, could also ramp up spending.

There is now less policy room to respond to a significant deterioration in domestic or external demand than in 2008, but adequate measures are still available, according to Stephen Green, head of China research at Standard Chartered Bank in Shanghai.

NO MAGIC CURE

All well and good, but if China were to relax policy, the main beneficiaries are likely to be commodity producers, not rich industrial economies, Capital Economics reckons. The London consultancy calculates that China's huge stimulus in 2008 reduced its merchandise trade surpluses with the United States and Europe by just $19 billion and $26 billion respectively between 2007 and 2009 - equivalent to 0.1 percent of their GDP.

For rapid growth in emerging markets to help the developed world, imports from China and oil-producing countries would have to rise sharply, reducing their external surpluses. But in fact, the emerging world's current account surplus is likely to increase in 2011 and remain high, said Neil Shearing, an analyst at Capital Economics.

In other words, far from helping the developed world out of its rut, emerging economies are becoming an increasing drag on demand in the rest of the world, he said in a note.

(Additional reporting by Stuart Grudgings in Rio de Janeiro; editing by Andrew Hay)

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