Emerging markets endured a torrid 2015, with GDP forecasts in a continual slide. Unfortunately, 2016 looks like a case of déjà vu all over again. Consensus forecasts for emerging-market growth next year are still heading downwards, a dynamic we expect to continue. In particular, despite emerging markets’ well-documented problems, consensus forecasts for many of the key economies still look too high. Emerging economies in aggregate, therefore, look set to feel ‘that sinking feeling’ for some time.
A number of points need to be made about the economic travails and sliding GDP forecasts of emerging markets:
* The slowdown has been both unusually protracted and synchronised.
* All regions (Asia, Latin America, CEEMEA) have been affected.
* Emerging markets have deteriorated even as developed economies have improved.
* Serial downward revisions suggest a steady drumbeat of negative shocks.
* Dismal recent indicators suggest little, if any, near-term respite.
The deterioration in emerging-market growth has been a long-run phenomenon. It is instructive to look at the evolution of the IMF’s medium-term forecasts for 2016 growth over the years. The IMF first forecast 2016 emerging-market growth back in its October 2011 World Economic Outlook (WEO). Initially pegged at 6.7%, each subsequent annual revision has pushed down expectations, with the latest WEO pegging 2016 growth at 4.5%.
The steady slide in emerging-market growth expectations in the medium-term highlights that the disappointment is both a structural and cyclical thing. Inevitably, slowing Chinese GDP growth is behind a substantial portion of the deterioration. Over the same period, the IMF’s forecast for Chinese GDP growth in 2016 has slipped from 9.5% to 6.3%; indeed, the Fund is more pessimistic on next year’s growth than we are, with our current 6.5% forecast.
But the slump is, of course, a much deeper issue than a Chinese slowdown. The largely synchronised nature of the deceleration suggests common shocks. Slower, more service sector- orientated growth as the Chinese economy
becomes better balanced has inevitably crimped commodity demand, affecting most emerging markets. The ‘free lunch’ many emerging economies enjoyed, feeding on high real commodity prices, has progressively vanished. China’s trade balance with commodity exporters has improved by around $200 billion over the last two years, a substantial income shock for many emerging markets.
Exacerbating the fallout is that most emerging markets, while gorging themselves on the macro buffet of high commodity prices and elevated export earnings, eschewed the structural reforms that would have left them better placed when time was called on the party. Brazil is the obvious poster child, but examples are legion. Indonesia is one: reform almost completely evaporated during the second term of the Susilo Bambang Yudhoyono presidency, leaving it poorly positioned to cope with the inevitable terms-of-trade and balance-of-payments shocks.
Emerging markets have also enjoyed a second ‘free lunch’ for much of the period after the global financial crisis, namely, zero US rates and access to cheap dollar debt. With Fed lift-off now imminent, this second boon is also drawing rapidly to close. Indeed, as markets have moved to price in Fed lift-off, US monetary policy has already effectively been tightened via the appreciating dollar. As we have argued on several occasions, a strong dollar operates as a global monetary-policy tightening, intensifying downward pressure on commodities and draining emerging-market liquidity by exacerbating capital flight. The interplay of these factors—slowing China, stronger dollar and falling commodities—is close to a perfect storm for emerging markets.
Heading into 2016, macro-momentum in much of the emerging-market universe remains dismal, with close to a record number of manufacturing PMIs below the 50 breakeven level and the down drafts of slowing Chinese industrial demand, more dollar strength and swooning commodity prices still in force. With our forecasts for 2016 GDP growth well below consensus for Brazil, Russia, Turkey and South Africa, consensus forecasts (at least in aggregate) look set to continue to slide and come in line with our estimates. Indeed, India is the only major emerging economy on which we are (slightly) more optimistic than consensus.
The author is chief economist, Emerging Markets & Asia ex -Japan, BNP Paribas