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Emerging Markets: weak external demand

Economic Update

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Emerging markets continue to struggle with weak external demand. As a result, many continue to show relatively weak growth rates. Growth in India came in at around 5% while growth in Ukraine contracted once more in the first quarter of this year. Although growth in Brazil remains weak as well, Brazil's Central Bank nonetheless raised its policy rate by 50bps to counter rising inflation. Despite still weak external demand, some emerging markets are posting relatively strong growth figures, such as Turkey and the Philippines. In these countries, domestic demand, either public and or private, remains strong and thus counteracts weakness on the external front.

Real GDP growth

Source: IMF April WEO update, China: May 29 update

Turkey - Strong growth but rising concerns

Turkey's economy recovered relatively strongly in 1Q13 after near-stagnation in the second half of 2012. On a seasonally-adjusted basis, GDP rose by 3.7% yoy, or 1.6% compared to the previous quarter. The expansion was mainly driven by private consumption growth and a very strong increase in public investments ahead of next year's elections. Reflecting ongoing weakness in the euro area, private investment declined and export growth slowed. Consequently, the current account deficit increased to 8% of GDP the first quarter, up from 4.8% in Q4. The rising dependency on external funding comes at a delicate moment, as recent protests may deter foreign investors and the stock market already faltered.

Real GDP growth

Source: EIU

Brazil – Central bank hikes policy rate

Last month, Brazil's central bank raised its SELIC policy rate by 50 basis points to 7.9%. In April, inflation was 6.49% and in March it was 6.59% (and thus above the 2.5-6.5% inflation target range), while core inflation has been at annualized rates of close to 6%. When asked if Brazil's consumption based growth was exhausted, the central bank president said that investment should now be the main engine of growth. It seems that this has been happening lately, as consumption has weakened, while capital goods production increased by a strong 3.2% yoy in April. However, given that inventory growth was high in 1Q13, we wonder whether investment will remain strong.

CPI and SELIC

Source: Reuters EcoWin

India – Economic growth still relatively weak

Recently released Indian data showed that the country's economy had grown 5% in fiscal year 2012-2013. Annual growth thus fell to the lowest level in a decade. In 1Q13, the economy grew only 4.8% yoy, against 4.7% in 4Q12. While the services sector performed relatively well, the manufacturing sector grew only 2.6% yoy in 1Q13 and the agricultural sector only 1.4% yoy. Furthermore, capital investment growth fell from 4.6% yoy in Q4 to 3.5% in Q1. The only good news is fiscal. The fiscal deficit fell to 4.9% of GDP, while the government expected a 5.2% deficit. Nevertheless, given the still rather high deficit, more structural efforts will need to follow.

Real GDP growth

Source: EIU

Ukraine – GDP continues to contract

Ukraine's real GDP contracted for the third consecutive quarter in 1Q13 by 1.1% yoy, preceded by yoy declines of 1.3% and 2.5% in the third and fourth quarters of 2012. A weak external environment, a struggling banking system and a dollar-peg of the local currency, all together continue to exacerbate the recession. Private consumption, accounting for over 70% of GDP, was the strongest contributing factor to economic activity in 1Q13. However, this is likely to slow down in the rest of the year, as weaker external demand drives up unemployment and the boost from elevated pre-election social transfers in 2012 fades. Overall, prospects of a recovery in growth remain bleak for this year.

Real GDP growth

Source: EIU

Philippines – Growth accelerates

Economic growth in the Philippines accelerated to 7.8% yoy in 1Q13, up from 7.1% yoy in 4Q12, non-seasonally adjusted. The annual growth rate in 2012 was revised up from 6.6% to 6.8%. The surprisingly strong growth in 1Q13 is the highest in Asia and was primarily driven by robust domestic demand. The private sector invested heavily to expand its capacity given strong domestic consumption. Investment grew by an exceptionally strong 47.7% yoy in 1Q13. The central bank is expected to leave its key policy rate on hold for the rest of the year. As the outlook on exports remains weak, domestic consumption will remain the main driver for economic growth this year.

Real GDP growth

Source: EIU

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