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Could the Emerging Market Slowdown Jeopardize the Global Recovery?


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Could the Emerging Market Slowdown Jeopardize the Global Recovery?

  1. 1.   Page  1  of  2            Economic  Commentary   QNB  Economics     June  8,  2014     Could  the  Emerging  Market  Slowdown  Jeopardize     the  Global  Recovery?     Following  the  large  outflow  of  global  capital  last   year,  Emerging  Markets  (EMs)  are  now  starting   to  feel  the  economic  pain.  EM  growth  is  slowing   sharply,   from   Brazil   to   Indonesia,   Russia   and   South   Africa,   partly   reflecting   the   tightening   of   domestic  policies  last  year  to  stabilize  EM  foreign   exchange   rates.   This   slowdown   is   impacting   global   export   demand,   thus   affecting   the   recovery  in  advanced  economies  as  well.  Overall,   the   EM   slowdown   could   jeopardize   the   global   recovery,  unless  advanced  economies  pick  up  the   slack.   Since   the   announcement   by   the   US   Federal   Reserve   (Fed)   in   May   2013   of   its   intention   to   taper   its   asset-­‐purchasing   program—the   so-­‐ called   Quantitative   Easing   (QE)—global   capital   flew   out   of   EMs,   forcing   EM   central   banks   to   tighten   domestic   policies   to   stabilize   their   exchange   rates   (see   our   related   Economic   Commentary   dated   April   27,   2014).   While   the   tightening   has   been   relatively   successful   in   reversing  the  capital  outflow  in  some    countries,   the   impact   on   EM   growth   is   just   starting   to   be   felt.   The   last   few   weeks   have   witnessed   a   series   of   disappointing  EM  data  releases.  Brazil’s  Q1  real   GDP   growth   rate   slowed   to   0.7%   (quarter-­‐on-­‐ quarter   annualized),   compared   with   2.3%   for   2013   as   a   whole.   Indonesia’s   Q1   growth   rate   declined  to  3.5%  (5.8%  in  2013).  South  Africa’s   Q1  GDP  contracted  0.6%,  compared  with  growth   of   1.9%   in   2013.   The   most   dramatic   fall   was   in   Thailand   with   an   annualized   Q1   contraction   of   8.2%,   partly   reflecting   the   current   political   instability.   Against   this   trend,   India   saw   a   jump   in  Q1  GDP  growth  to  an  annualized  8.2%,  partly   due   to   a   record   USD5bn   spending   on   elections,   which  added  an  estimated  2  percentage  points  to   growth  in  the  first  quarter.   Growth  Rates  in  Selected  EMs   (%  Change)     Sources:  Bloomberg  and  national  statistical  authorities   This   generalized   slowdown   in   EM   growth   is   impacting   global   trade   flows.   EMs   account   for   approximately   40%   of   all   global   trade   activity   and  have  been  among  the  largest  contributors  to   global   export   growth   in   recent   years.   The   EM   slowdown   is   therefore   having   an   impact   on   global   export   growth.   According   to   the   World   Trade   Organization,   the   USD   value   of   global   exports  grew  by  a  mere  1.7%  year-­‐on-­‐year  in  the   first  quarter  of  2014,  compared  with  4.3%  in  Q4   2013.  Most  of  this  slowdown  can  be  attributed  to   lower   export   demand   from   EMs.   In   turn,   lower   global   export   demand   has   contributed   to   lower   Q1  real  GDP  growth  in  both  the  US  (-­‐1.0%)  and   the  Euro  area  (0.2%).     Is   the   EM   slowdown   therefore   jeopardizing   the   global   recovery?   The   short   answer   is   it   could,   unless  advanced  economies  pick  up  the  slack.  So   far,   the   EM   slowdown   has   not   yet   resulted   in   a   contraction   in   global   trade   as   witnessed   during   the   Great   Recession   of   2008-­‐09.   If   advanced   economies   continue   to   recover   and   pick   up   the   slack   of   the   EM   slowdown,   the   global   economy   should   be   able   to   maintain   its   growth   momentum.     South  Africa Turkey Brazil Russia Indonesia India Thailand -­‐12% -­‐9% -­‐6% -­‐3% 0% 3% 6% 9% 12% 2008 2009 2010 2011 2012 2013 2014Q1
  2. 2.   Page  2  of  2     Economic  Commentary   QNB  Economics     June  8,  2014     The   performance   of   advanced   economies   critically   depends   on   the   normalization   of   US   monetary   policy.   The   Fed   seems   to   be   set   on   completing   QE   tapering   in   late   2014.   If   QE   tapering  results  in  weaker  US  growth,  long-­‐term   US  interest  rates  are  likely  to  remain  below  3%,   thus   pushing   global   capital   out   in   search   for   higher   returns   in   EMs.   The   result   could   be   an   uneven  global  recovery  in  favor  of  EMs,  just  like   in  the  period  2010-­‐13.  On  the  other  hand,  if  the   US  economy  recovers  as  expected,  long-­‐term  US   interest  rates  are  likely  to  go  up,  making  EMs  less   attractive.  In  turn,  this  would  imply  a  further  EM   slowdown,   while   advanced   economies     recover.   This   may   make   for   a   more   balanced   and   sustainable   global   recovery   as   advanced   economies  account  for  a  larger  portion  of  global   trade.   Overall,  the  global  economy  seems  once  again  at   a   crossroads.   With   the   EM   slowdown,   global   trade  is  being  affected,  which  in  turn  is  having  a   negative   impact   on   growth   in   advanced   economies.  If  the  normalization  of  US  monetary   policy   results   in   a   gradual   recovery   in   the   US,   advanced  economies  should  be  able  to  make  up   the   slack   at   the   expense   of   a   further   EM   slowdown.   The   latest   growth   data   from   the   US,   however,   suggest   a   rather   different   scenario,   which   may   indeed   jeopardize   the   global   recovery.     Contacts   Joannes  Mongardini   Head  of  Economics   Tel.  (+974)  4453-­‐4412   Rory  Fyfe   Senior  Economist   Tel.  (+974)  4453-­‐4643   Ehsan  Khoman   Economist   Tel.  (+974)  4453-­‐4423   Hamda  Al-­‐Thani   Economist   Tel.  (+974)  4453-­‐4646   Ziad  Daoud   Economist   Tel.  (+974)  4453-­‐4642     Disclaimer  and  Copyright  Notice:  QNB  Group  accepts  no  liability  whatsoever  for  any  direct  or  indirect  losses  arising  from  use  of  this  report.   Where  an  opinion  is  expressed,  unless  otherwise  provided,  it  is  that  of  the  analyst  or  author  only.  Any  investment  decision  should  depend  on  the   individual  circumstances  of  the  investor  and  be  based  on  specifically  engaged  investment  advice.    The  report  is  distributed  on  a  complimentary   basis.  It  may  not  be  reproduced  in  whole  or  in  part  without  permission  from  QNB  Group.