The global economy is entering dangerous territory. Concerns about US and eurozone debt challenges remain centre stage – and rightly so. But increasingly worrying is what’s happening in emerging markets.
Since the global financial crisis, these markets, led by China, have been the primary force for economic growth. So much so that such countries as Brazil, Turkey and India are in danger of overheating.
Many developing nations are working to stem growth in an effort to prevent runaway inflation – an objective that seems to be succeeding, with input-cost inflation in emerging markets at its tamest in two-and-a-half years, according to HSBC.
At the same time, however, the same bank’s data point to the weakest level of emerging markets growth in two years. The HSBC emerging markets index, which uses purchasing managers’ index data, dipped to 54.2 in the second quarter, down from 55 in the three months before and below the long-run series average of 54.8.
The moderation in economic activity is evident across all regions, led by a weaker increase in manufacturing production and reduced export orders in China, Brazil and Russia.
The big unknowns are how long the slowdown will last and how severe it will be. Most analysts remain optimistic. A recent note from RBC Capital Markets, for example, stated that many parts of the emerging world were undergoing a soft landing, largely driven by the tightening measures adopted by monetary authorities throughout the developing world.
As yet there are few signs that this tightening cycle is nearing its end. Only last month, the Reserve Bank of India, for example, unexpectedly raised interest rates by 50 basis points to combat inflationary pressures. It was India’s 11th rate rise since March 2010 and it is likely that further tightening is to come.
Other big emerging economies are taking similar action. The People’s Bank of China raised its lending rate by 25bp recently, its fifth increase since October, as inflation remains the biggest economic challenge facing the country’s policymakers.
In Brazil, efforts to rein in inflation have prompted the central bank to raise the benchmark interest rate five times this year, to 12.5%. This action is taking its toll on the country’s stock market, with the Bovespa down 13.5% this year. Foreign investment in Brazilian equities has been particularly badly affected, having fallen by 70% in the first half of the year, according to the Financial Times.
RBC expects the outlook for emerging economies to begin to improve towards the end of the third quarter, which the bank believes will coincide with a peak in headline inflation. That in turn should let policymakers keep rates on hold and allow growth to pick up again.
Is this view too benign? Quite possibly. Much depends on how the Chinese authorities navigate their way through the risks building up thanks to the easy money on offer following the global credit crunch. Again most analysts are sanguine that a collapse of the property market and a spiralling of bad debts, especially within local government, can be averted.
With alarm bells still ringing over the fiscal situation in both the US and Europe the last thing the global economy needs is for China, and the developing markets in general, to veer off course.
