Asia Emerging market GDP growth seen rising from lows
Analysts reluctant to call definitive bottom as downside risks remain EM Squared
NOVEMBER 17, 2015 1:51 PM
by: Steve Johnson
Amid all the doom and gloom over the state of emerging market economies, could the worst now be behind us?
Recent data offers tantalising evidence that economic activity might be crawling up from its cyclical lows (http://next.ft.com/content/46f42c36-8965-11e5-90de-f44762bf9896) —even if wary analysts remain reluctant to call a definitive uptrend.
JPMorgan estimates that emerging market gross domestic product growth rebounded to a seasonally adjusted annual rate of 4.2 per cent in the third quarter of 2015, comfortably above the low of 3.2 per cent recorded in the first half of the year.
With GDP growth in the developed world slowing from 2.2 per cent to 1.6 per cent over the same period, largely driven by contraction in Japan and weaker growth in the US, the emerging markets were able to start to rebuild their long-running cushion over DMs, as the first chart shows.
The recovery in EM-wide growth is largely driven by stabilisation in Russia (http://next.ft.com/content/c4a2eaa6-8c7f-11e5-8be4-3506bf20cc2b), which JPMorgan estimates enjoyed seasonally adjusted growth of 0.7 per cent in the third quarter, after its economy contracted at a 7.3 per cent annual rate in the first six months of 2015.
What JPMorgan refers to as “core” emerging Asia — stripping out the giants of China and India — also appears to be bouncing back, with seasonally adjusted Q3 growth likely to come in at around 3.7 per cent, up from just 1.5 per cent three months earlier.
Thailand reported annualised growth of 4 per cent on Tuesday, up from 1.4 per cent in the second quarter, while both Taiwan and Singapore, which saw their economies contract in the second quarter, have subsequently returned to growth.
Indeed, if JPMorgan’s forecasts prove correct, the abnormally low second quarter core EM Asia reading will ultimately prove to be an outlier from the pattern of solid, if unspectacular growth, as the second chart shows.
On the plus side, Mr Hensley expects the recession currently gripping Brazil to ease off in its intensity. More broadly, EM countries should start to gain some benefit from their weaker currencies while tepid inflation in many countries should open the door to “modest” easing of monetary policy.
But while this might suggest the weak growth of the first half of 2015 will turn out to be a “pothole”, he warns that the risks “are skewed to the downside”, particularly with credit conditions tightening in emerging markets, making it harder for companies to borrow.
“Is that the worst over? I’m not convinced,” says Mr Hensley. “It’s possible Russia will level out but the balance of factors elsewhere might slow growth a little and it will drop down into the threes [ie between 3 and 3.9 per cent]. That’s a little bit worse than our official forecast.”
UBS said on Tuesday that it also foresaw a slight pick up in EM economic growth (http://www.ft.com/intl/markets/emerging-markets) next year, to 3.6 per cent, from around 3.2 per cent in 2015 (based on the EM world being weighted as per the MSCI EM equity index).
However this would still be one of the worst five readings in the past 20 years, and would leave the spread between EM and DM growth at just 2.1 percentage points, the lowest level since 2000, as the last chart shows.
Manik Narain, EM strategist at UBS, also sees Brazil and Russia performing less badly in 2016, but says growth in China is likely to decelerate to around 6.2 per cent next year, from 6.9 per cent at present.
More broadly, Mr Narain believes growth will be kept in check by “signs that the developed world’s propensity to import from the emerging markets is falling”; a slowing of Chinese consumer spending growth, even as Beijing pivots towards domestic consumption; rising EM private sector indebtedness; and rising unemployment in countries such as Turkey and South Africa.
“The risks are very much to the downside. The risk that [EM growth] rebounds strongly doesn’t seem to outweigh the risk of it slowing,” says Mr Narain.
