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Emerging markets: momentum remains weak

Economic Update

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  • Recent data releases show that economic momentum in most emerging markets remains relatively weak. In China, economic growth fell to 7.5%.
  • Meanwhile, India’s industrial production in May was very disappointing. South Korea was somewhat of an outlier in Asia, as the country posted the highest quarterly growth in two years.
  • Both Brazil and Turkey tightened monetary policy. The former is responding to stubbornly high inflation while the latter is trying to attract foreign capital to finance its current account deficit. 

Real GDP growth

Source: IMF July WEO update

China – Growth slows further in Q2

China’s GDP growth slowed further in 13Q2 to 7.5% y-o-y, down from 7.7% in 13Q1. This was mostly due to weaker external demand (exports fell by 3.1% y-o-y in June and, as a result, the external sector made a negative contribution to growth in Q2). The Chinese government still considers the economic development as ‘stable’. Although it recently launched a mini-stimulus package to reduce risks of a ‘hard-landing’. Premier Li has stated that the government will not let growth slide below a lower limit, which remains undisclosed. As activity is expected to slow further, the government’s resolve to tolerate lower growth in favour of longer term sustainability will surely be tested.

Real GDP growth

Source: Reuters EcoWin

India – Industrial production data disappoint

India’s industrial production (IP) in May was very disappointing. IP fell 1.6% y-o-y, whereas the market was expecting a 1.5% increase. Looking at the breakdown, manufacturing output fell 2.0% y-o-y while mining output fell even sharper (-5.7%). The new data suggest that a hoped-for industrial recovery is not yet in sight. Nevertheless, the central bank is unlikely to implement monetary easing as it seeks to limit the fall of the rupee, which has depcreciated rapidly against the US dollar recently. Another inhibiting factor is the high consumer price inflation (9.9% in June). 

Industrial production

Source: EIU

South Korea – Surging growth

South Korea’s economy grew 1.1% q-o-q in 13Q2, up from 0.8% in 13Q1. This was much better than expected and a 2-year high. The expenditure breakdown reveals that government consumption grew by a rapid 2.4% q-o-q, while private consumption grew 0.6%, after falling 0.4% in Q2. Export growth came in at 1.5%, which was slower than Q1 (3%). Meanwhile, investment grew by 1.9% thanks to strong construction activity. In response to a sluggish property market and China’s growth slowdown, the government boosted its spending recently while the central bank cut its key interest rate in May. The economic policy easing should support activity at the margin. 

South Korea – Surging growth

Source: Bank of Korea

Brazil – Central bank continues to hike

On 10 July, Brazil’s central bank once again increased its key policy rate (SELIC) by 50 basis points to 8.5%. This is in response to rising consumer prices. In June, inflation increased to 6.7%, which means that it was above the 2.5%-6.5% target range. On a monthly basis, inflation has eased, though, as it fell from 0.55% in April to 0.26% in June. However, inflation tends to be lower from May to July, as the harvest increases the food supply during that time of the year. The central bank has also indicated that it is likely to further increase the SELIC rate during its August meeting. This may help the monetary authorities regain their inflation-fighting credibility but will probably weigh on growth in the near-term.

Brazil – Central bank continues to hike

Source: EIU, IBGE

Turkey - Tightening monetary policy

As signaled earlier, Turkey's overnight lending rate, the ceiling rate of the interest rate corridor, was raised by 75bps to 7.25% on 23 July. The key policy rate was left unchanged at 4.5%. Yet the central bank indicated that if the lira were to come under pressure, it would stop funding banks at the policy rate and start charging the ceiling rate instead. Overall, the rate hike may be too small to attract sufficient funding for Turkey’s large current account deficit. Further interest rate hikes are thus likely, even if they weaken economic growth. Though being politically impopular ahead of next year’s elections, this would reduce imports and, therefore, also the need for external financing.

Turkey - Tightening monetary policy

Source: Bloomberg

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