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Lights dim for emerging economies
Commodity prices can be a good barometer for emerging market growth, and their relentless sell-off over the past two months has tracked the fading of the one bright light in the global economic recovery.
June 25, 2012 11:27 by Reuters
Brazil and India are slowing sharply, China has ratcheted down a notch as global trade slows, and the almost 30 percent decline in the price of oil has hit Russia’s economy. These all make for troublesome developments when Europe is teetering on the edge of recession and U.S. business is retrenching.
“This is part of the long period of healing in the global economy,” said Pablo Goldberg, head of emerging markets research at HSBC.
Emerging and developing economies had roared out of the 2007-2009 global financial crisis to post 7.5 percent and 6.2 percent GDP growth in 2010 and 2011. They were lifted by generous stimulus programs and their solid government, bank and household balance sheets.
The stellar performance helped drive commodity prices to heady levels. The Thomson Reuters/Jeffries Commodity Research Bureau Index hit a record level above 471 in mid-2008 on strong demand from emerging economies before retreating. It rallied again from late 2009 until mid-2011.
But as China showed signs of slowing, it has slumped, and since March this year, the index has lost 18 percent. The hope had been that buoyancy in emerging markets would allow the global economy to ride out its long and painful healing as U.S. households paid down debt and banks cleaned up their balance sheets.
Then Europe’s government debt problems intervened, protracting the slow recovery. European Unionleaders meet next weekend, but they have warned not to expect any quick fix to the 2-1/2 year old debt crisis. The most they expect to deliver at their summit is an agreement to move forward on a banking union, while pushing off fiscal and political union to a later date.
This gradualist approach will keep the euro zone in a perilous state for many months or even years ahead, with Spain and Italy vulnerable to market pressures, hurting growth.Now the drivers for emerging market growth are fading too. Export demand from Europe, and to a lesser extent the United States, is slumping. Despite growing domestic consumer markets, emerging economies remain heavily export dependent.
A round of central bank tightening last year to counter inflationary pressures is starting to bite. China in 2010 and 2011 tightened interest rates by 1.25 percentage points and Brazil and India by 3.75 percentage points. In addition, financial market volatility driven by the euro crisis is scaring investors away from riskier assets. At the same time, major Western banks are withdrawing from emerging markets as they restructure and rebuild their capital base.
All of this is sucking investment from emerging markets.The Institute of International Finance estimates that international banks have withdrawn $190 billion in financing from Latin America and Eastern Europe since the second half of 2011.
“That undermines their capacity to finance investment projects, which in turn exacerbates the negative impact on emerging markets’ fixed investments stemming from both higher uncertainty and weaker future demand from advanced economies,” said Martin Schwerdtfeger, a senior economist at TD Economics.
Investment banks have started to lower their emerging market growth forecasts. Barclay’s Capital shaved 0.2 percentage point from this year’s GDP outlook, to 5.6 percent, and by half that amount from its 2013 forecast, to 6.2 percent.
Credit Suisse is more pessimistic. It cut its GDP forecast by 0.4 percentage point in both 2012 and 2013, to 5.1 percent and 5.6 percent respectively, and warned that worse could come if Europe’s problems deepen.
World leaders at their G20 summit in Los Cabos, Mexico, last week noted that “clearly the global economy remains vulnerable.” If economic conditions further deteriorate significantly, countries with sound budgets stand ready to implement additional budgetary stimulus measures, they said.
But this time around, emerging economies have less room to maneuver. In 2008, their budgets on average were in balance. Four years later, they have a 2 percent deficit, Credit Suisse estimates. On the monetary front, policy rates on average were 7 percent in 2008 and today are several points lower.
In other words, for a variety of domestic policy reasons, any new round of macroeconomic stimulus would likely be less forceful than the one that engineered the strong rebound in 2009 and 2010. So Credit Suisse warns not to expect emerging economies to rescue global growth for a second time.
“We may not be at the brink of a new global recession, but we are even less likely to be at the threshold of a global boom,” it said.