HSBC Emerging Markets Index Q4 2011

Transcription

1 HSBC Emerging Markets Index Q4 2011

2 Stephen King Growth remains subdued but inflation pressures very much under control 17 January 2012 Emerging nations retain firepower to deal with fallout from soggy US recovery and potential European recession The HSBC Emerging Market Index (EMI) stood at 52.2 in the final quarter of 2011, little-changed from the 52.0 level recorded in the third quarter, implying a subdued rate of economic expansion. Although not yet back to the recessionary levels recorded in late-2008 and the early months of 2009, the index is now a long way short of the levels reached in the early months of recovery in late-2009 and early One benefit of a weaker rate of expansion has been a further decline in inflationary pressures across the emerging world. A year ago, inflation was a major headache but the latest EMI readings confirm that price pressures are now very much back under control. From now on, the trick will be to maintain subdued inflation while avoiding economic collapse. Many commentators have argued that the weakness in emerging market activity is primarily the result of factors beyond the emerging nations own control. Most obviously, there has been a rush to blame the eurozone crisis for the loss of emerging market momentum. Certainly, weak readings from some of the major Asian exporters including Hong Kong, South Korea and Taiwan are consistent with this hypothesis. Yet the softening of activity in the emerging world appears, in many cases, to have preceded the eurozone s recent troubles. It now looks as though world trade growth peaked at the beginning of 2011 and has been slowing ever since. For much of last year, the loss of momentum was associated not so much with disappointing growth in the eurozone but, instead, weakness in the US, the UK and the emerging economies themselves. At the beginning of 2011, economists were mostly optimistic about prospects for a cyclical rebound in both the US and the UK. Interest rates in both countries were low, central banks had demonstrated their willingness to use quantitative easing and other unconventional policy options and the US, in particular, had always demonstrated an uncanny knack of delivering bounceback-ability. On this latest occasion, however, growth has been profoundly disappointing, largely a reflection of ongoing de-leveraging. World trade has suffered and emerging exporters have been squeezed. The slowdown in emerging market activity has also been selfinflicted. The upheavals in the Middle East have not only increased economic and political uncertainty within the region but have contributed also to elevated oil prices, squeezing real 2

3 incomes elsewhere in the emerging world. And, with inflation earlier last year at relatively elevated levels, it was inevitable that many emerging nations would have to adopt policies designed both to inhibit growth and to ease price pressures. The big issue at the time was whether these policies would work. Given aversion to currency appreciation, policymakers in the emerging world were unwilling to raise interest rates too far for fear of attracting excessive capital inflows. Instead, they chose to adopt quantitative tightening measures designed to limit the quantity of credit on offer for a given interest rate. These took many different forms, including increases in reserve ratios and the imposition of capital controls in one form or another. These policies appear to have had some degree of success. While not all countries have managed to bring inflation to heel Turkey, for example, is still struggling there can be no doubt that progress has been made. Chinese inflation, which threatened to run amok earlier last year, is now very much on the wane, thanks to persistent increases in reserve ratios. Indeed, so successful has been the fight against inflation that policymakers in the emerging world are now a lot more worried about a lack of growth. Of particular concern is the impact of the eurozone crisis on 2012 growth prospects. The emerging nations most obviously affected by the eurozone crisis are those directly in the firing line, specifically the nations of central and eastern Europe. Their vulnerability hinges on both trade exposure and their dependency on eurozone banks for funding. They are not alone, however. As 2011 drew to a close, many emerging currencies ended up a lot softer, partly reflecting repatriation of funds by eurozone banks. No one can be sure how the eurozone crisis will end. Our central view is that the euro will survive in its current form but that things are likely to get worse before they get better. The European Central Bank will ultimately have to print vast amounts of money, in our view, and use the newly-created funds to support vulnerable bond markets. But that s only likely to happen when the economic crisis has spread within the eurozone from the periphery to the core: that means a threat of recession not just in Italy and Spain but in, for example, Germany too. In the months ahead, the emerging world will have to cope not just with a soggy recovery in the US but also with a potential decline in economic activity in Europe. This will not be easy: we know from the 2008/09 experience that, in times of severe economic stress, emerging nations are heavily exposed. At least, however, emerging nations still retain some firepower to deal with any fallout: unlike the developed world, there s still plenty of room to cut interest rates and provide fiscal stimulus. That doesn t imply immunity but it does suggest that emerging nations may eventually be able to enjoy some much-needed bounceback-ability. Stephen King Group Chief Economist 3

4 HSBC Emerging Markets Index Manufacturing weakness weighs on emerging market output growth in Q4 Key findings: Manufacturing output down for second successive quarter......but service sector activity growth quickens slightly in Q4 Service sector business optimism historically weak Input price inflation eases to 10-quarter low Emerging market activity growth broadly unchanged in Q4 The Q4 EMI findings painted a broadly similar growth picture to that seen in Q3, with the HSBC Emerging Markets Index, a quarterly indicator derived from the monthly PMI surveys, posting 52.2, up slightly from Although consistent with continued emerging market activity growth (covering manufacturing and services), the index was at a level indicative of a modest rate of expansion in the context of historic data. The EMI is based on 21 PMI (Purchasing Managers Index ) surveys conducted across 16 emerging markets and provides the earliest and most reliable indication of economic trends. The uptick in emerging market output growth primarily reflected an improved rate of expansion in services, as manufacturers recorded a further decline in production. Although only slight, the pace of reduction in factory output was the sharpest since Q In fact, the divergence between the indexes monitoring services and manufacturing output was the widest in 11 quarters. Manufacturing weakness most apparent in emerging Asia Manufacturing weakness in emerging Asia was the main factor behind the latest decline at the headline level, with, Hong Kong, Taiwan and South Korea all recording further reductions in factory output during Q4. Meanwhile, Singapore saw a stagnation of activity over the quarter. Taiwan recorded by far the sharpest pace of decline of all emerging markets, followed by South Korea, where output fell at the fastest rate in 11 quarters. Meanwhile, saw activity fall for a second successive quarter, albeit at only a slight rate. n manufacturers, on the other hand, registered a solid expansion of production. The relevant index was nonetheless the thirdlowest in the series history. Eastern European manufacturers generally fared better than Asian companies in Q4. Growth of factory output was recorded in the Czech Republic and Poland, although rates of expansion were markedly weaker than one year earlier. and Turkey, meanwhile, recorded stronger rates of activity growth, with the rise in the latter the fastest in three quarters. Emerging market manufacturers reported lower volumes of new export business in Q4. However, the pace of reduction was fractional, and slower than in Q3. Looking at the largest emerging markets,, and all recorded renewed export growth, while saw a third successive quarterly decline. Service sector growth ticks up in Q4 The latest EMI findings showed a slight pick up in service sector EMI (all-sector output).0 = no-change on the previous quarter, S.Adj BRIC (all-sector output).0 = no-change on the previous quarter, S.Adj. 4

5 activity growth from the nine-quarter low seen in Q3. Of the bigfour emerging markets, (highest since Q1 2010) and recorded faster rates of expansion, while (10-quarter low) and (worst since Q1 2011) saw growth ease. Only recorded an above trend expansion of services output in Q4. Looking ahead, emerging market service providers expressed continued optimism in the one-year business outlook, although the degree of positive sentiment was muted in the context of historic data. Confidence among Chinese service providers hit a series-record low in Q4, while and saw service sector optimism dip to 11- and 12-quarter lows respectively. On the other hand, ian service providers were at their most optimistic in four years. Delivery times lengthen at only marginal rate Average lead times continued to lengthen in Q4, although the rate of deterioration in vendor performance remained slight. All emerging markets in Asia and Eastern Europe recorded longer delivery times, while the South American nations of and Mexico were two of only a handful of markets to see an improvement in supplier performance. The slower rate of lead time lengthening compared to earlier in the year reflected reduced purchasing and a continued preference among manufacturers towards stock depletion. The amount of inputs purchased by emerging market manufacturers fell for the first time in 11 quarters, albeit only marginally, while firms continued to deplete their holdings of pre-production goods. Price pressures continue to ease in Q4 Input price inflation in emerging markets moderated to a tenquarter low in the final quarter of 2011, with both manufacturers and service providers noting easing price pressures. Cost inflation was stronger in services relative to manufacturing, where input prices increased at the slowest rate in the current two-and-a-half period of inflation. Moreover, the index monitoring manufacturing input price trends was more than 19 points lower than one year earlier. Subdued cost inflation provided emerging market manufacturers with greater scope to lower average tariffs in Q4, with latest data signalling a decline in charges for the first time since Q In contrast, service providers recorded another rise in output prices, although the pace of inflation was the weakest in five quarters. As a result, selling prices at the composite level rose only marginally in Q4. Job creation remains muted; backlogs of work fall further Emerging market companies continued to increase their employee numbers in Q4, although the rate of job creation was only modest. Employment growth occurred despite a third successive quarterly decline in outstanding business. Although marginal, the rate of backlog depletion was the fastest since Q Falling backlogs commonly indicate the development of spare capacity, which suggests that employment growth will remain muted heading into the new year. Service providers recorded a moderate increase in staff levels during Q4, with growth picking up slightly from the previous quarter. In contrast, manufacturing firms reduced their workforce numbers at a negligible rate, the first decrease in 10 quarters. Orders and exports.0 = no-change on the previous quarter, S.Adj. Exports (manufacturing) New Orders (all sectors) Employment and backlogs of work.0 = no-change on the previous quarter, S.Adj. Outstanding Business (all sectors) Employment (all sectors) Input and output prices.0 = no-change on the previous quarter, S.Adj. Increasing rate of inflation EMI Input Prices (all sectors) EMI Output Prices (all sectors) Increasing rate of deflation 5

6 Output Emerging market output growth remains subdued in Q4 Emerging market output (covering manufacturing and services) rose further during the final quarter of 2011, although the pace of expansion remained subdued in the context of historic data and masked divergences by sector. Manufacturing production fell marginally for the second successive quarter. In contrast, service providers reported a solid expansion of business activity during Q4. That said, the pace of growth was much slower than the long-run trend. Looking at the largest emerging markets, and saw overall activity growth ease to 11- and 10-quarter lows respectively, while recorded a renewed expansion of private sector output. registered the steepest growth in Q4. However, the pace of expansion was slower than in any quarter prior to the financial crisis. Output by sector.0 = no-change on the previous quarter, S.Adj. New Business New business growth holds steady at belowtrend rate Growth of demand for goods and services remained belowtrend in the final quarter of 2011, with new business rising at an identical rate to that seen in Q3. Similar to the trend for output, emerging market manufacturers saw new orders fall at the fastest rate since Q1 2009, with overall weakness centred on Asia, while service providers noted a slightly improved rate of new business growth across the quarter as a whole. Assessing the combined growth of manufacturing and service sector new orders in the largest emerging markets, recorded a modest rate of expansion. saw growth of new business ease to the lowest since Q1 2009, while and (ten-quarter low) recorded below-trend rates of new order growth. New business by sector.0 = no-change on the previous quarter, S.Adj. All sectors Services Manufacturing All sectors Services Manufacturing Output in BRIC countries (all sectors).0 = no-change on the previous quarter, S.Adj. New business in BRIC countries (all sectors).0 = no-change on the previous quarter, S.Adj. 25 6

7 Outstanding Business Employment Backlogs of work down for third successive quarter Emerging market companies reported another reduction in work-in-hand (but yet completed) during the final quarter of Although only marginal, the rate of decline was the sharpest since Q Marginal rates of backlog depletion were registered across both manufacturing and service sectors, for the second and third successive quarters respectively. Looking at the largest emerging markets, and both recorded reductions in backlogs of work during Q4, with the latter signalling the steeper pace of contraction. In contrast, registered a continued expansion of outstanding business, although the pace of increase was only marginal. Meanwhile, growth of backlogs of work eased to a negligible rate in. Outstanding business by sector Emerging market employment rises at only modest rate Emerging market employment increased for a tenth successive quarter in Q Although slightly stronger than in Q3, the rate of job creation was only modest. Manufacturers saw a reduction in staff numbers for the first time since Q2 2009, although the rate of job shedding was fractional. Conversely, service providers added to their workforce numbers over the quarter. The rate of jobs growth was only modest, however, and slower than the long-run trend for the series. For the second quarter in a row, three of the big-four emerging markets recorded a rise in overall employment, with the exception. Employment growth remained marginal in, while rates of job creation improved slightly in (threequarter high) and. Employment by sector.0 = no-change on the previous quarter, S.Adj..0 = no-change on the previous quarter, S.Adj. All sectors Services Manufacturing All sectors Services Manufacturing Outstanding business in BRIC countries (all sectors) Employment in BRIC countries (all sectors).0 = no-change on the previous quarter, S.Adj..0 = no-change on the previous quarter, S.Adj. 7

8 Input Prices Output Prices Input price inflation eases to two-and-a-half year low in Q4 The rate of input price inflation in emerging markets eased for a third consecutive quarter in Q4, with the latest increase in average costs the weakest since Q Rates of input cost inflation moderated across both manufacturing and service sectors, reaching 10- and eightquarter lows respectively. Easing input price pressures were more apparent in manufacturing, with the relevant index down more than 19 points from one year ago. Of the largest emerging markets, was the only nation to recorded a fall in input prices, albeit marginal. (9-quarter low), and (weakest since Q1 2010) all recorded slower rates of input cost inflation. However, companies in both and saw much stronger cost increases than ian private sector firms. Input prices by sector 80 Output prices set by emerging market firms rise only marginally Prices charged by emerging market companies for their goods and services rose for a tenth successive quarter during Q However, the rate of inflation was only modest, and the weakest in that sequence. There were divergent trends at the sector level. Manufacturers reported a reduction in factory gate charges, ending a ninequarter period of inflation. Service providers, meanwhile, noted a continued rise in selling prices, although the rate of inflation eased to the slowest since Q Of the big-four emerging markets, was the only nation to record a reduction in overall charges, the first fall since Q recorded the fastest rate of output price inflation, followed by. Only a marginal rise in average tariffs was signalled by ian private sector companies. Output prices by sector.0 = no-change on the previous quarter, S.Adj. Increasing rate of inflation.0 = no-change on the previous quarter, S.Adj. Increasing rate of inflation 20 All sectors Services Manufacturing Increasing rate of deflation All sectors Services Manufacturing Increasing rate of deflation Input prices in BRIC countries (all sectors) Output prices in BRIC countries (all sectors).0 = no-change on the previous quarter, S.Adj. Increasing rate of inflation.0 = no-change on the previous quarter, S.Adj. Increasing rate of inflation Increasing rate of deflation Increasing rate of deflation 8

9 New Export Orders New export business broadly unchanged Quantity of Purchases Purchasing activity declines fractionally Receipts of new export orders at emerging market manufacturers were broadly unchanged in Q4, following a modest contraction in the third quarter. Of the four largest emerging markets the BRIC members, and all registered an increased inflow of new export work., meanwhile, posted a moderate decline. Turkey, Saudi Arabia and the UAE were the only other emerging markets covered by the PMIs to record growth in the fourth quarter. The Czech Republic, Israel, Poland, Singapore, Taiwan, South Korea and Hong Kong all saw declines in new work from abroad. Moreover, rates of reduction accelerated across most of these markets. In the Czech Republic, foreign demand fell for the first time in over two years. New export orders (manufacturing) Marking an end to a two-and-a-half year run of growth, buying activity fell at emerging market manufacturers in the final quarter of However, the rate of decrease was only fractional. Behind the weaker aggregate performance were contractions in input purchasing across six monitored emerging market manufacturing sectors (, Czech Republic, Poland, Taiwan, South Korea and Hong Kong). In both Poland and the Czech Republic, the decreases were the first seen since Q3 2009, while in South Korea it was the first reduction this year. Expansions were recorded in,, Turkey, Saudi Arabia and the UAE, and at faster rates with the exception of UAE. Meanwhile, buying activity growth broadly stagnated in. Quantity of purchases (manufacturing).0 = no-change on the previous quarter, S.Adj..0 = no-change on the previous quarter, S.Adj. New export orders in BRIC countries (manufacturing) Quantity of purchases in BRIC countries (manufacturing).0 = no-change on the previous quarter, S.Adj..0 = no-change on the previous quarter, S.Adj

10 Stocks of Finished Goods Stocks of Purchases Post-production stocks fall further in Q4 Finished goods inventories continued to be depleted at emerging market manufacturers during the latest survey quarter. Post-production holdings have never risen during the near eight-year history of the composite series. However, the rate of decline eased since Q3 to only a slight pace that was slower than the long-term series average. Contractions were recorded almost across the board, with rates of reduction accelerating in the Czech Republic, Poland,, Taiwan and South Korea. Meanwhile, and Turkey posted their first reductions in post-production stocks for four and three quarters respectively. Latest data for pointed to a marginal rate of growth that was similar to that seen in Q3. Holdings were unchanged overall in, following one year of decline. Stocks of finished goods (manufacturing) Manufacturers continue to deplete input holdings Pre-production holdings at emerging market manufacturers fell during Q4, as was the case in the previous two quarters. However, the rate of depletion eased slightly to a modest pace. Of the emerging markets covered by the PMIs, 11 recorded a drop in input holdings in Q4. Inventories were reduced for the second consecutive quarter in Israel, Singapore and Taiwan, and for the third straight quarter in both Turkey and Hong Kong. Contractionary periods were longer in, South Korea (both six quarters), (seven quarters), Poland (four years) and (over 14 years). For the Czech Republic, it was the first recorded decline since Q , South Africa, Mexico, Saudi Arabia and the UAE all posted growth of input stocks in Q4. Stocks of purchases (manufacturing).0 = no-change on the previous quarter, S.Adj..0 = no-change on the previous quarter, S.Adj. Stocks of finished goods in BRIC countries (manufacturing) Stocks of purchases in BRIC countries (manufacturing).0 = no-change on the previous quarter, S.Adj..0 = no-change on the previous quarter, S.Adj. 10

11 Suppliers Delivery Times Business Expectations Reduced purchasing contributes to only marginal rate of lead time lengthening The average time taken by vendors to deliver inputs to emerging market manufacturers continued to lengthen during Q4. The pace of deterioration in supplier performance was slight, however, and weaker than rates seen throughout much of the past two years. This in part reflected reduced purchasing and a preference among firms towards stock depletion. Average lead times lengthened across the majority of emerging markets monitored, with, Saudi Arabia, South Africa, Mexico and UAE the exceptions. Of those emerging markets that recorded a deterioration in vendor performance, only saw an easing in the rate of lead time lengthening (slowest since Q3 2009). Meanwhile,, Hong Kong and Taiwan all noted renewed deteriorations in supplier performance following improvements in Q3. Suppliers delivery times (manufacturing) Service sector optimism edges higher, but remains muted nonetheless Emerging market service providers expressed continued optimism in the one-year business outlook during Q4, although the degree of positive sentiment was muted in the context of historic data. Chinese service providers were the least optimistic about future activity levels, with confidence hitting a series-record low in the final quarter of the year. saw service sector optimism dip to a 11-quarter low, with the relevant Business Expectations Index posting its largest quarter-on-quarter decline since Q Moreover, positive sentiment in was the lowest in three years. In stark contrast, ian service providers were optimistic about future activity levels to the greatest extent in four years. Business expectations (services).0 = no-change on the previous quarter, S.Adj. Increasing rate of shortening.0 = no-change on the previous quarter, S.Adj. 90 Increasing optimism 80 Increasing rate of lengthening Suppliers delivery times in BRIC countries (manufacturing) Business expectations in BRIC countries (services).0 = no-change on the previous quarter, S.Adj. Increasing rate of shortening.0 = no-change on the previous quarter, S.Adj. Increasing optimism Increasing rate of lengthening Increasing pessimism 11

12 Background Information The Survey The HSBC Emerging Markets Index (EMI) is a weighted composite indicator derived from national Purchasing Managers Index (PMI ) surveys in the emerging markets of Czech Republic, Hong Kong, Israel, Mexico, Poland, Singapore, South Africa, South Korea, Taiwan, Turkey, UAE, Saudi Arabia and the increasingly important BRIC economies of,, and. These surveys collectively track business conditions in over 5,800 reporting companies. The Purchasing Managers Index (PMI ) surveys on which the EMI is based have become the most closely-watched business surveys in the world, with an unmatched reputation for accurately anticipating official data. The survey data are collected using identical methods in all countries, with survey panels stratified geographically and by International Standard Industrial Classification (ISIC) group, based on contributions to GDP. Survey responses reflect the change, if any, in the current month compared to the previous month based on data collected mid-month. For each of the indicators, a diffusion index is produced, which reflects the percentage of positive responses plus a half of those responding the same. Diffusion indexes have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change. An index reading above indicates an overall increase in that variable, below an overall decrease. All data are seasonally adjusted. Data collected at the national level for manufacturing and services are then weighted together according to relative contributions to national or regional GDP to produce indicators at the national whole economy or aggregate emerging market level. Data Sources Country/ Region South Korea Taiwan Hong Kong South Africa Producer: BER Singapore Israel Turkey Poland Czech Republic Mexico UAE Saudi Arabia HSBC SIPMM IPLMA IMEF HSBC Holdings plc, the parent company of the HSBC Group, is headquartered in London. The Group serves customers worldwide from around 7,0 offices in over 80 countries and territories in Europe, the Asia-Pacific region, North and Latin America, and the Middle East and North Africa. With assets of US$2,716bn at September 2011, HSBC is one of the world s largest banking and financial services organisations. For further information please visit About is a leading, global financial information services company with over 2,0 employees. The company provides independent data, valuations and trade processing across all asset classes in order to enhance transparency, reduce risk and improve operational efficiency. Its client base includes the most significant institutional participants in the financial market place. For more information please see About Economics Economics is a specialist compiler of business surveys and economic indices, including the Purchasing Managers Index (PMI ) series, which is now available for 32 countries and also for key regions including the Eurozone. The PMIs have become the most closely watched business surveys in the world, favoured by central banks, financial markets and business decision makers for their ability to provide up-to-date, accurate and often unique monthly indicators of economic trends. WARNING Whilst every effort has been made in the preparation of this report to ensure accuracy of the statistical and other contents, the publishers and data suppliers cannot accept any liability in respect of errors or omissions or for any losses or consequential losses arising from such errors or omissions. The information provided in this report is not intended as investment advice and investors should seek professional financial advice before making any investment decisions. 12

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