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Sentiment towards emerging markets continues to decline just as the developed world finally appears to be recovering.
HSBC this week published April numbers for two indicators: its Emerging Market Index, derived from PMI surveys, and its Emerging Market Future Output Index, which is broadly a gauge of sentiment. Both fell: the first signalling a slowdown in economic growth in global emerging markets to the weakest level for one and a half years, and the second to its lowest level since September.
In particular, all four BRIC nations are struggling to varying degrees. Three of the four registered slower output growth in April, particularly China, with Brazil the only exception.
However, Pablo Goldberg, HSBC’s global head of EM Research in New York, told Emerging Markets that the outlook varied from place to place. “If you look at fundamentals, there are nuances between countries,” he said. “China has disappointed, although suggestions were too bullish to start with. Mexico is slowing, but is not far from what was expected. Some countries, like Asean countries, have done better than expected, as has Korea, and Russia.
“It’s a mixed picture. But it’s true that on a growth basis, emerging markets are entering a cyclical slowdown.” This has been reflected in far weaker performance in emerging market equities than their developed world peers, a theme which will be addressed in tomorrow’s edition.
Neil Shearing, chief emerging markets economist at Capital Economics, agreed a cyclical shift was taking place. “We’ve got used to this period whereby emerging market growth continued to strengthen and the developed world started to struggle,” he said. “The tables have turned a little, certainly since the start of the year.” Partly this is a consequence of the considerable improvements in the US economy, and rising optimism about Europe. “But data from emerging markets has been disappointing, really: we saw growth slow through the first half of 2012, and though it picked up in the second half, it then started to slow again.”
Shearing attributes the worsening emerging markets numbers to weaker growth in Latin America and in all four BRICs, as well as weaker growth in emerging Europe. “There are a few parts that seem to be doing quite well – Africa, southeast Asia – but by and large there is a broadbased decline.”
The BRICs will drive momentum and sentiment, he said, “because these four economies have been responsible for about a quarter of global GDP growth over the last decade, but each of them are now running into structural problems and are going to have weaker growth over the next decade.” In China’s case he blamed over-reliance on investment, and in Brazil and Russia, on consumption. “The point is each of the four BRICs need structural reform in order to address problems, rather than policy stimulus, and that is going to be quite difficult to achieve.
“I’m not forecasting doom and gloom, but weaker growth in BRICs is enough to shave half a percentage point off global GDP,” he said. “When you consider global growth is so weak in the first place, that’s significant.”
Within emerging Europe, economists noted a divergent range of challenges: Turkey accelerating; Poland, the Czech Republic and Hungary suffering with Europe; and Russia facing slowing growth combined with rising inflation.
