Emerging Markets Weekly Economic Briefing

Transcription

1 Emerging Markets Weekly Economic Briefing Global scenarios Slower growth in emerging markets is a key risk to our central forecast for the global economy. While more positive signs have recently appeared in advanced economies, emerging markets continue to disappoint. Five years ago it looked as though emerging markets might decouple from other economies and perform more strongly; now there is a risk that they could decouple in the opposite direction, failing to accelerate while advanced economies finally recover. This is one of six alternative scenarios we have quantified as part of our quarterly assessment of the downside and upside risks to our central forecasts. The others are a Greek Eurozone exit; the break-up of the Eurozone; faster tapering of US monetary policy; an oil price crash; and a Golden age of more positive news across the industrialised world. This article considers the effects of all six on growth in emerging markets. Baseline scenario Positive indications for growth in the advanced economies have emerged in recent weeks. For instance, in the US, the manufacturing and non-manufacturing ISM surveys improved sharply in July. Meanwhile, the Eurozone finally moved out of recession in Q, after six consecutive falls. Especially promising were the strong manufacturing data for July and August in Germany, which may point to a revival of investment activity in the region. Incoming data for Japan and the UK have also been upbeat, leading to further upward revisions to our growth forecasts for both countries. Rather than world trade growth leading the upturn, improving domestic demand in the advanced economies including investment has been the key factor. Indeed, the upturn in the advanced economies has occurred despite a weaker picture in the emerging economies. Chinese data remain lacklustre and we have made significant downgrades to India, Brazil and Russia in recent G7 & Emerging Markets: GDP growth Emerging Markets Source: Oxford Economics 3 August 13 G7 F'cast BRICS: Consumer prices 1 Brazil India (CPI) 1 1 Russia 1 China

2 months. While recent data are promising, it is far from clear that the advanced economies have reached escape velocity and that stimulus can therefore be pared back. In our view, it makes sense to err on the side of caution and maintain stimulus until recovery is clearly established. This implies caution on tapering asset purchases in the US and some countries perhaps reconsidering planned fiscal tightening. Recent forward guidance by central banks in the UK and Eurozone, aimed at keeping a loose monetary stance, also makes sense. Overall, we forecast world GDP growth (at market exchange rates) of % in 13, somewhat lower than our expectations at the beginning of the year. We continue to forecast a strengthening in global economic activity next year, with world GDP growth reaching close to 3% in 1. We currently place a 5% probability on this baseline scenario. Impact on emerging markets of alternative scenarios GDP CPI Baseline* BRICs growth constrained Greek exit Eurozone breakup Faster taper or 199 revisited Golden age. 1. Oil price crash or 19 revisited * 1 growth. Each scenario shows the difference from this BRICs growth constrained Emerging markets have disappointed so far this year and we could be underestimating the causes and duration of this period of sub-par growth. In China in particular, there are significant concerns about the degree of risk that the fast-growing shadow banking sector involves. In other emerging markets, like Brazil and India, growth could be more significantly constrained by poor institutions and policy errors than we currently assume. In this scenario, China s shadow banking expansion ceases to be benign as over-indebtedness reaches a critical level. The government tightens its policy against speculative investment much more severely than in the baseline and constrains China s investment-led growth. Widespread defaults on unregulated non-bank loans engineer a credit crisis, with financial contagion effects spilling over to the rest of East Asia and the wider global economy. China s economy grows 5% in 1 and remains subdued at 5.% in 15. Similarly, the growth potential in other emerging markets turns out lower than assumed in our baseline forecast, with investment in particular not growing as fast. Emerging markets GDP growth falls to.5% in 1, compared with 5% in the baseline. We assign a 15% probability to this scenario. 3 August 13

3 Greece exits and shatters the Eurozone With Greece likely to run a primary (i.e. excluding interest payments) budget surplus from 1, a Eurozone exit which would apparently free the country from policies dictated by the EU and the IMF could look like a viable option. We continue to think that leaving the Eurozone would be an economic disaster for Greece. With countries like Portugal and Spain still very fragile as well, the costs of keeping the other peripherals in the Eurozone would be large, both politically and financially. As a result, if one country Greece were to leave, this would most likely lead to further exits. We have therefore quantified two break-up scenarios. One has only Greece leaving the Eurozone; the other assumes that the remaining peripheral countries (Greece, Ireland, Portugal, Spain, Italy and Cyprus) all follow. In both cases the break-up happens in Q1 15. Even a contained Greek exit would have a significant impact on global growth. Emerging market GDP growth falls to 3.% in 1, compared to 5% in the baseline. A broader break-up is much more damaging, pulling growth down to just.7%. We assign a 5% probability to a Greek exit scenario and a 1% probability to a broader break-up of the Eurozone. Faster taper, or 199 revisited In this scenario, the US Fed tapers quantitative easing slightly earlier than in the baseline. Financial markets respond negatively, fearing that outright asset sales are likely. Increased risk aversion and falling asset prices lead US GDP growth to slow to close to zero in 15. Financial and trade contagion means that growth in the rest of the world is hit too. The US economy grinds to a halt in 15. The slump in the US, combined with capital outflows, mean that the upturn in emerging markets is further delayed. China s GDP growth falls to 5.5% in 1. Brazil s GDP growth does not reach 3% until 1. Emerging markets GDP growth falls by.1 percentage points to.9% in 1. Globally, unemployment rises back to the peaks reached in /9. We assign a 5% probability to this scenario. Golden age A number of upside risks exist, in particular for advanced economies. The US could benefit more than we currently forecast from very high competitiveness and unfolding technological change. Surprisingly robust exports from some Eurozone peripheral countries suggest that we could be underestimating the extent of reforms already achieved in these countries. And if the so-called third arrow of the reforms by Japan s Prime Minister, Abe, proves successful, our growth forecast will turn out to be too conservative. In this scenario, we quantify the impact of some of these upside risks being realised. Though the origins lie in advanced economies, emerging markets would also benefit from higher world trade. A growing risk appetite would also be likely to bolster capital flows, especially of foreign direct investment into emerging markets. 3 August 13

4 Emerging market GDP accelerates, reaching 7% in 1. The probability of this scenario is 1%. Oil price crash or 19 revisited Our baseline forecast for oil production assumes strong medium-term growth in oil production in the US, primarily as a result of the rapid increase in unconventional oil output. However, this could still prove too conservative. In this scenario, US oil production rises by one third more than our baseline forecast by 17. Saudi Arabia increases oil production in an attempt to gain market share, much as it did in the mid-19s, further adding to downward pressure on oil prices. Oil prices fall to around $7/barrel in 1, more than 3% lower than in the baseline. The global economy benefits significantly from lower oil prices. World GDP growth picks up and emerging markets grow by % in 1, with inflation falling to.%, compared with 5.7% in the baseline. The probability of this scenario is 5%. Conclusion As has been the case over the past few years, the risks to the global economy are skewed to the downside. Very different sources of risk could derail the recovery shown in our baseline forecast. The most immediate risk relates to emerging markets, which could continue to disappoint. Further ahead, the Eurozone is still a source of risk and will be likely to remain so for some time as the restructuring work at country and regional levels will take many years. The US Fed could also destabilise the global economy if it fails to communicate its withdrawal of unconventional monetary stimulus adequately. But some upside risks exist too. The recent positive data in advanced economies provide encouraging signs that the recovery could gather pace faster than we currently envisage. And if the shale oil potential in North America is larger than we assume at present, oil prices could fall significantly, to the benefit of the oil-importing world. Impact on GDP Eurozone breakup Oil price crash Greek exit Emerging markets decouple Golden Age Faster taper Impact on inflation The size of the bubble is proportional to the scenarios probabilities 3 August 13

5 Latest data Recent Data Releases Previous month Latest Comment Brazil GDP (Q, s.adj) Private spending (Q, s.adj) Investment (Q, s.adj) Export Volumes (Q, s.adj).% q/q 1.9% y/y.5% y/y.% y/y -5.1% y/y 1.5% q/q 3.3% y/y.% y/y.% y/y.% y/y The economy picked up ahead of expectations in Q. Export volumes rebounded sharply in Q, growing by.9% q/q as the currency depreciated. Import volumes grew by just.% q/q, helping net exports to make a strong contribution to growth. Investment has improved notably this year, but consumer spending remains sluggish. India GDP (Q) Manufacturing (Q) Services (Q).% y/y.% y/y.3% y/y.% y/y -1.% y/y.% y/y The manufacturing sector contracted in Q, dragging headline growth lower. Services proved more robust with public services and finance, business and real estate growing particularly strongly. Mexico Exports (Jul, seas. adj.).% m/m.% y/y.9% m/m 3.3% y/y Exports picked up slightly in July (in value terms) helped by higher oil prices and rising crude petroleum sales. Poland GDP (Q, s.adj) Private spending (Q, s.adj) Investment (Q, s.adj) Export Volumes (Q, s.adj).% q/q.7% y/y.3% y/y -9.% y/y 5.% y/y.% q/q 1.1% y/y.1% y/y -11.% y/y 5.5% y/y The economy made little progress in Q1 as household spending stagnated for a fourth successive quarter and investment fell at its fastest quarterly rate since Q. Encouragingly though, export volumes rose by more than 1% q/q for a third quarter, indicating an improving outlook. Korea Wholesale & Retail Current Account (m total) -.1% y/y $59.bn (Jun) -.% y/y $59.bn (Jul) Wholesale and retail trade volumes remain very subdued but exports are gradually picking up, extending the current account surplus. Turkey Capacity Utilisation Business Confidence 7.9 (Jul, s.adj) 15.1 (Jul, s.adj) 7.9 (Aug) 15.7 (Aug) Manufacturing capacity utilisation has been unchanged for the past three months, and business confidence have also remained steady at reasonable levels. South Africa GDP (Q, s.adj).% q/q 1.9% y/y.% q/q 1.% y/y Manufacturing output rose by.% q/q, offsetting a 1.% q/q drop in mining. Hong Kong Exports (Jul) -.% y/y 1.% y/y Exports have been very volatile this year, so July s increase is not part of an upward trend. Philippines GDP (Q) Private Spending (Q) Fixed Investment (Q) Export Volumes (Q).3% q/q (s.adj) 7.7% y/y 5.5% y/y 15.% y/y -7.% y/y 1.% q/q (s.adj) 7.5% y/y 5.% y/y 9.7% y/y -.5% y/y The economy matched China s pace of growth in Q. Domestic spending has strong momentum and public spending continued to grow strongly, although this raises questions about the longer term fiscal position. Export volumes fell for the second successive quarter. Czech Business Confidence Consumer Confidence. (Jul) 1.3 (Jul). (Aug).9 (Aug) Though still historically low, confidence has been edging up in recent months. Singapore Industrial Output ex Biomed (Jul).1% m/m.9% y/y -.% m/m.9% y/y Industrial production remains fragile, although electronics output has begun to pick up in recent months. 3 August 13

6 Events Monetary policy meetings in past week August 9 th - Brazil 9.% Key rate (now) Outcome Comment (Selic Rate) Up 5bp The central bank raised the interest rate by 5bp for a third successive meeting. Inflation eased back to.3% in July, just inside the.5% upper band of the target range, but the authorities aim to bring inflation back down to its 5.5% central target. As a result we expect further rate hikes, taking Selic to 9.75% by the end of the year. August 9 th - Indonesia 7.% (Policy Rate) Up 5bp Bank Indonesia unexpectedly increased the interest rate by 5bp, having raised rates by a combined 75bp in June and July and then left the main interest rate on hold at the meeting earlier this month. Having passed 1, against the US$ in July, the rupiah has continued to depreciate in August and the bank is worried about the effect this may have on inflation expectations. August 7 th - Hungary 3.% (Base Rate) Down bp The central bank cut the interest rate by bp. GDP growth was disappointing in Q at just.1% q/q and inflation surprised on the downside by falling to 1.% in July. Our forecast remains that interest rates will bottom at 3.5% in the current cycle. For more information contact Clare Howarth (chowarth@oxfordeconomics.com) or Sarah Fowler (sfowler@oxfordeconomics.com) 3 August 13

7 Asia China: Manufacturing PMI India: Real GDP 5 = expansion / contraction line Official PMI 5 Investment HSBC PMI 5-5 Consumer spending GDP (output) Source: China Federation of Logistics and Purchasing / Markit Korea, Taiwan & Thailand: Industrial output 5=1 (seasonally adjusted) Korea Taiwan 7 Thailand 1 / Oxford Economics East Asia: Retail sales volumes (3 month moving average) Taiwan (estimated) China (estimated) Korea (Wholesale/Retail) Emerging Asia: Monthly investment indicators (3 month average) 3 Thailand Korea Emerging Asia: Exports by destination US$bn (seasonally adjusted) 3 Exports of Korea, Thailand 7 and Taiwan Japan China & HK 1 US Leading EU 3 August 13

8 Asia Indonesia: Interest rates & CPI inflation % Policy interest rate CPI inflation Source: Bank Indonesia India: Interest rates and wholesale prices 1 1 Mumbai 3-month offered rate Repo rate Wholesale prices (WPI) inflation Source: Oxford Economics South East Asia: Real GDP 1 5 Emergers: Equity markets Index (Dec 3, 1 = 1) Philippines 11 1 China Indonesia Korea Indonesia India 7 Jan-11 Jul-11 Jan- Jul- Jan-13 Jul-13 Emergers: Exchange rates v US$ Index (Dec 3, 1 = 1) 11 China 15 1 Korea Emergers: Exchange rates v US$ Index (Dec 3, 1 = 1) 11 appreciation Philippines 1 Singapore 1 Malaysia 95 9 Indonesia appreciation India Thailand Jan-11 Jul-11 Jan- Jul- Jan-13 Jul-13 9 Jan-11 Jul-11 Jan- Jul- Jan-13 Jul-13 3 August 13

9 Latin America Brazil: GDP, consumer spending & investment Consumer spending Investment GDP Latin America: Unemployment rate % (seasonally adjusted) Brazil (estimated) Mexico Brazil: Bank lending Total private sector -5 Industry & commerce sectors -1 1 Latin America: Consumer prices 1 Brazil Colombia Mexico - Chile Latin America: Short-term interest rates % Emergers: Exchange rates v US$ Index (Dec 3,1 = 1) 11 1 Brazil Argentina Chile Mexico Colombia Mexico Chile depreciation Brazil 1 5 Jan-11 Jul-11 Jan- Jul- Jan-13 Jul-13 3 August 13

10 Emerging Europe Central & East. Europe: Retail sales volumes Czech: Industrial & consumer confidence 5=1 (seasonally adjusted) % balance 19 3 Industrial 17 Russia Poland Czech Hungary Consumer 5 1 / Oxford Economics Central & Eastern Europe: Trade balance US$ bn US$ bn month total 1 Hungary 1 Czech Russia (RHS) -3 Poland CEE: Bank lending 7 Romania 5 Russia 3 Poland 1 Estonia -1 1 Emergers: Exchange rates v Euro Index (Dec 3, 1 = 1) 19 1 Hungary 13 Czech 1 97 Poland 9 91 depreciation 5 Jan-11 Jul-11 Jan- Jul- Jan-13 Jul-13 Central & Eastern Europe: Interest rates % Poland 1 Hungary Romania Czech 1 3 August 13

11 Rest of the world & financial developments South Africa: Real GDP Turkey: Monthly trade balance % US$ mn (seasonally adjusted) Annual % change Quarterly annualised rate Turkey: Manufacturing capacity utilisation % (seasonally adjusted) Emergers: Exchange rates Index (Dec 3, 1 = 1) Turkey (v Euro) S. Africa (v US$) 7 5 depreciation Jan-11 Jul-11 Jan- Jul- Jan-13 Jul-13 Emergers: 1 year government bond yields % 11 1 Turkey 9 South Africa 7 Poland 5 Korea 3 Jan-11 Jul-11 Jan- Jul- Jan-13 Jul-13 Emergers: Equity markets Index (Dec 3, 1 = 1) 1 13 US S&P Emergers (MSCI, US$) 7 Jan-11 Jul-11 Jan- Jul- Jan-13 Jul-13 3 August 13

12 Industrial Production Percentage changes on a year earlier unless otherwise stated China Brazil Korea India Mexico Russia Turkey Taiwa n Poland Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Consumer prices Percentage changes on a year earlier unless otherwise stated China Brazil Korea India Mexico Russia Turkey Taiwa n Poland Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul August 13

13 Exports (US dollars) Percentage changes on a year earlier unless otherwise stated China Brazil Korea India Mexico Russia Turkey Taiwa n Poland Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Imports (US dollars) Percentage changes on a year earlier unless otherwise stated China Brazil Korea India Mexico Russia Turkey Taiwa n Poland Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul August 13