THE cooling of emerging markets runs the risk of chilling the global economy. The world’s growth engines after the 2008 financial crisis, emerging markets are losing momentum as manufacturing in China contracts and recessions loom in Brazil and Russia.
At Credit Suisse Group, economists predict the expansion of developing countries will slow to 3.8 percent this year, the weakest since 2009. By contrast, they see a 2.2 percent pace in industrial nations, the strongest in five years.
That would leave the growth gap between the two at 1.6 percentage points, the smallest since 2001 and down from 2.5 points last year. It was about 6 points in 2007. What’s more, industrial production is set to expand at the same pace in both this year for the first time since 1998.
While more balanced growth may be desirable, the Credit Suisse team worries that emerging markets may keep on sliding under the pressure of falling commodity prices, a rising dollar and potential US interest rate increases.
“Transitions are rarely orderly,” the economists led by Neville Hill and James Sweeney said in a March 20 report.
“A key risk this year is that some emerging economies deliver a financial or economic accident sufficient for the convergence of EM (emerging markets) and DM (developed markets) growth rates to overshoot and keep deflation fears alive.”
Accidents happen
Accidents do happen. The Latin American turmoil of the 1980s, Mexican crisis of 1994 and Asian turbulence of 1997/98 all stemmed in part from an advancing dollar and tighter US monetary policy. The transmission was more direct then since exchange rates were pegged to the greenback and foreign debts were excessive.
While such flaws are not as prevalent now, the Federal Reserve still sent shockwaves through emerging markets two years ago when officials signalled they would slow quantitative easing. Last week’s surprising dovishness from Fed chair Janet Yellen probably gave smaller economies only a temporary respite.
Of the potential for upset now, a devaluation of the Chinese yuan in response to tighter US policy would deal the biggest deflationary blow elsewhere, according to Credit Suisse. Latin America also looks vulnerable given growth is weak and inflation high. “If EM growth slows decisively further, this region may well be where it happens,” Credit Suisse said. – Bloomberg