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December 22, 2017

News in Charts: Stronger Growth and Improved Resilience

by Fathom Consulting.

by Fathom Consulting.

The world is enjoying a synchronised economic upturn. GDP growth forecasts have been revised up in many countries, and emerging market (EM) economies are no different. Brazil and Russia’s emergence from recession has been faster than we — or the consensus — had expected. Meanwhile, economic activity in India is gaining momentum after a sustained slowdown. The 32% rally in EM equities in 2017 is testament to this bullish backdrop. We think the EM GDP growth spurt is likely to be supported by three factors: rising exports; strong investment; and low inflation.

EM economies benefit disproportionately from trade, and this year’s upturn has been a boon. As highlighted previously, the much-discussed ‘end of globalisation’ has been greatly exaggerated. 2017 has seen a pickup in economic activity in the three largest parts of the global economy — China, Europe and the US. That has boosted EM exports, which suffered for several years from sluggish global demand and falling commodity prices. With China continuing to double down on credit-fuelled investment, Europe enjoying a strong upswing, and the US economy set to receive a fiscal boost, we think the EM export growth story still has legs.

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In a virtuous cycle, increased foreign demand has been accompanied by rising domestic investment. Annual growth in gross fixed capital formation has picked up in many EM economies. This revival reflects the delayed impact of easier monetary policy, improved business confidence, and the partial recovery in commodity prices. With a benign global macroeconomic backdrop and firm commodity prices, we expect this recovery to continue.

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Finally, muted price pressures will keep interest rates low, supporting domestic demand. Inflation has dropped noticeably in recent years, aided by stable or strengthening currencies and spare slack. This impact has been particularly pronounced in Brazil and Russia. In our view, inflation in this year’s outliers, Mexico and Turkey, is likely to drop next year, as sharp currency-related spikes unwind. That should allow monetary policy to remain loose, helping to boost consumption and investment.

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Aided by the three factors outlined above, we expect average EM GDP growth to pick up next year, and support asset prices in the emerging world.

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