April 8, 2018
All 25 largest economies expanding for the first time since 2011
Every major developing economy is set to expand this year, the first time the world has witnessed such synchronized growth since 2011.
Saudi Arabia, the last of the 25 largest emerging markets to be mired in recession, is likely to have returned to growth in the first quarter of this year, recent data suggest.
With Argentina, Brazil, Nigeria and Russia all having emerged from recession in 2017, and South Africa and the United Arab Emirates seemingly having narrowly avoided falling into the same quagmire, the developing world finally appears to be replicating the golden period it enjoyed between the Asian, Russian and Argentine financial crises of 1997-2002 and the global financial crisis of 2008-09.
“It’s unusual [for all the major EMs to be growing simultaneously],” said William Jackson, senior emerging market economist at Capital Economics, a consultancy.
“Our forecasts are for that to continue. A lot of the headwinds that have affected emerging markets are fading. Commodity prices have now stabilised, global growth has picked up and currencies have weakened, the inflationary impulse of that has fed through and [monetary] policy can be a bit more supportive.”
Charles Robertson, chief economist at Renaissance Capital, an investment bank focused on emerging markets, agreed that across-the-board growth was “unusual”, arguing it was the legacy of growth-supportive monetary policy in the US and eurozone, alongside the recovery in commodity prices.
Venezuela, the 27th largest emerging market, is the biggest economy still contracting, with the IMF perhaps optimistically forecasting that gross domestic product will fall by “only” 6 per cent this year, half of last year’s decline and the fifth straight year of recession.
Aside from Venezuela, where an increasingly authoritarian regime is doing its best to squander the legacy of the world’s largest oil reserves, the only other countries where the IMF forecasts contraction this year are Equatorial Guinea — facing a seventh straight year of decline — Nauru, South Sudan and Swaziland, as well as the US territory of Puerto Rico. (It no longer collates data for Syria.)
If this came to pass, it would be the lowest figure since at least 2000.
As to what could overturn the rosy growth picture for the larger developing countries, either this year or in the medium term, Gary Greenberg, head of global emerging markets at Hermes, an asset manager, points to the ratcheting up of trade tensions between the US and China.
“From an EM point of view, we finally catch a break and then we get a ball bearing in the machine bouncing around crazily and potentially causing a problem,” Mr Greenberg said. “This is a year when emerging market economies are all doing pretty well. It would be nice to ignore the politics and say it’s all noise but it would be brave to predict it’s all going to die down, that it’s all going away.”
Mr Greenberg said his intuition was that “the collateral damage” from a trade war “is going to be very substantial”, but that it is hard to know at this point who will be worst hit.
Mr Jackson was more sanguine, however, arguing that, based on the putative trade tariffs unveiled by Washington and Beijing so far, “the impact on China is generally seen as relatively small and the knock-on effect is small as well”.
He saw the impact on Mexico of a “messy” conclusion to the renegotiation of the North American Free Trade Agreement as potentially more damaging, but even then “it’s difficult to see it resulting in recession”.
Instead Mr Jackson said South Africa, Russia and Brazil were more likely potential medium-term recession candidates, given that the economic recoveries in all three countries are still quite fragile, meaning they could be derailed by a fresh slide in commodity prices.
Likewise, with Saudi Arabia likely to grow by just 1-1.5 per cent this year, it could potentially slip back into contraction territory “if austerity perhaps comes back on to the agenda more quickly than we had anticipated or if oil prices fell again or if the Saudi authorities cut output to raise oil prices”.
A stronger candidate, though, may be Turkey, where a combination of strong economic growth and lax monetary policy has resulted in a widening current account deficit and a slide in the lira, which in turn could push inflation even higher than its current 10.2 per cent.
“That might trigger very aggressive rate hikes and a recession. It’s not in our forecasts, or anyone’s at the moment, but if it continues concern will grow,” Mr Jackson said. Mr Robertson, concurs with this analysis, saying: “Turkey is the one I think has a chance of going wrong.”
“There is a chance of an old school EM crisis. The central bank has not been able to hike rates as much as it should and the currency is under pressure, hitting an all-time low,” he added.
More broadly, though, Mr Robertson argued that there were no real signs of overheating in emerging markets, with the largest current account deficits in the 22 countries of the MSCI EM equity index being the 4.6 per cent of GDP in Turkey and 4.4 per cent in Pakistan which, while “not good numbers for these two . . . are not dramatic numbers”.
“If they are the worst two in emerging markets, that’s not too bad a story,” he added.
The bigger determinant of the health of EMs is instead the strength of economic growth in Europe, China and, especially, the US, Mr Robertson said.
“How long can the US grow without creating inflation? Markets would already be flagging a problem a year ahead, but they are not flagging a serious problem,” he added.
Mr Greenberg also saw the strength of the US economy, as well as the credit markets, where a widening of high-yield spreads was one of several developments making him “nervous”, as crucial for the health of developing economies.
Whatever the US does, though, Mr Greenberg’s medium to long-term prognosis for emerging market growth is somewhat downbeat. “I don’t think we are going to see the strong growth that we saw in the past,” he said.
“The world has changed. With a few exceptions, such as China, India and Indonesia, a lot of economies are not going to be particularly fast growing. Countries are becoming more mature.
“Latam countries are in low single digits [in terms of GDP growth], and that in a world where everything is going very well. Taiwan and Korea probably won’t grow at much more than 1 per cent. [Growth of] 3-4 per cent, rather than 6-7, will be the way forward for these countries.”