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Global economic outlook: disappointing growth in EMs slows down world economy

Economic Quarterly Report

  • Economic growth in emerging markets disappoints again this year after growth had already slowed down in previous years. Low commodity prices and the slowdown in economic growth in China are largely responsible
  • On the other hand, lower commodity prices are boosting growth in developed countries. As a result, the effect of disappointing exports to emerging markets is less than might be expected
  • Growth in developed countries will pick up somewhat due to higher growth in the Eurozone, but on balance this will not be enough to prevent a slight slowdown in global growth 

Concerns about Chinese economic growth and excess supply put pressure on commodity prices

A combination of supply and demand factors and less favourable expectations for global economic growth have caused prices for most commodities to fall in recent months to their lowest level in more than 10 years (figure 2). On the demand side, (concerns about) the slowdown in economic growth in China, the world’s biggest importer of commodities, in particular, seem to be exerting negative pressure on prices. There has been a sharp fall this year in growth in construction investment and industrial production, for example, and manufacturing purchasing managers’ indices were strikingly negative in July and August. The year-on-year decrease of 8% in Chinese exports in July suggested that the economy was also facing increasingly adverse external economic conditions. Furthermore, the recent stock-market crash and the depreciation of the Chinese currency raised fears among investors that the state of the Chinese economy may not be as healthy as had previously been assumed. Incidentally, most indicators suggest that while growth in industrial production, construction and investment may have fallen substantially, growth in the service sector and consumption in China is still quite buoyant. The US, the UK and the eurozone are also continuing to experience economic growth.

Even so, the above picture is bad news for the commodity markets given that China’s construction sector and industry are particularly big consumers of commodities. The considerable reduction in the growth in Chinese investment and industrial production had a strong impact on imports, which actually fell at the start of this year. Imports of coal, zinc and to a lesser extent iron ore experienced particularly steep falls. However, growth in imports of copper ore, crude oil and LPG was sustained, and total Chinese imports have risen again in the past two months. Even so, commodity prices fell across the board. This shows that it is not just actual imports but, in particular, expectations regarding the future growth in the demand for commodities and supply factors that are determining prices. On the demand side, the above-mentioned concerns about the developments in China and the effect of this on global economic growth are putting persistent negative pressure on commodity prices.

The same applies to factors on the supply side. The abundant supply of many metals, the rise of shale oil and the reluctance of Saudi Arabia to scale back oil production are all having a negative effect on commodity prices. Delayed supply-side responses seem to be a factor here. The high prices of recent years encouraged investment in extraction capacity, which is now leading to increased supplies and thus contributing to the fall in prices. Because there has also been considerable depreciation in the currencies of most commodity-producing countries, production costs measured in US dollars (USD) also fell, which may delay the reduction of overcapacity.

Figure 1: Slowdown in growth of emerging markets
Figure 1: Slowdown in growth of emerging marketsSource: IMF
Figure 2: Commodity prices
Figure 2: Commodity pricesSource: Bloomberg

Bad news for commodity exporters and emerging markets

The above is bad news for countries that are net exporters of commodities. The fall in commodity prices is having an adverse effect on their terms of trade (the ratio between export and import prices). Given the strong correlation between commodity prices and economic growth in recent decades in the commodity-exporting regions of Latin America, the Middle East, North Africa, Russia and Central Asia, the recent further falls in commodity prices can be expected to put yet more pressure on economic growth there. This can also be expected to lead to a deterioration in the budget balance and the current account in these countries.

Furthermore, the above factors are causing international investors to become more risk averse with regard to emerging countries, resulting in a further decline in capital inflows into these markets. These capital inflows have been under pressure for some time because of the increase in interest rates that the US central bank is expected to implement later this year (see US elsewhere in this Quarterly Report). In the past 12 months, a net amount of almost USD 300 billion has been withdrawn from the 30 largest emerging markets. This has led to considerable depreciation of emerging countries’ currencies against the US dollar. The biggest depreciations occurred in countries with domestic political issues, such as Malaysia, Turkey and Ukraine, or that are commodity exporters (Russia, Brazil and Colombia; figure 3).

Figure 3: Chinese import volumes of raw materials
Figure 3: Chinese. commoditiesSource: Macrobond

The extent of the negative impact that these developments ultimately have on the individual countries depends largely on how dependent they are on commodity exports, how flexible their economy is and the extent to which they enjoy a strong budgetary position and current account balance, and have buffers in the form of foreign currency reserves. The impact of falling commodity prices on countries with such flexibility will be less in the short term because they can pursue an anti-cyclical monetary and budgetary policy to mitigate the effect of the unavoidable adjustment process. Countries with low reserves and markedly high inflation on the other hand may suffer considerable economic pain. Nevertheless, relying on reserves that have been built up in the past is of course merely a temporary, transitional solution. If commodity prices remain depressed, numerous commodity exporters will have to fundamentally revise their economic model. 

Impact per region

A closer look at the key economic figures for the main emerging markets suggests that the global growth slowdown is likely to be more muted than might be expected. Although many countries in the Middle East are experiencing a considerable deterioration in their budgetary positions and current accounts, they are able to cope with the consequences in the short term because of their extensive currency reserves and resources in sovereign wealth funds. Economic diversification will be a major challenge for most of these countries in the somewhat longer term, but their governments will be able to maintain growth in the short term by pursuing an anti-cyclical policy. This however is not the case for Russia, which is also highly dependent on oil: its government is being forced to tighten the belt because of rapidly falling foreign reserves, high inflation and Western sanctions. With the exception of Malaysia and Thailand, which are plagued by political problems, the Asia-Pacific region is in a reasonably good position, despite the close trading relations with China. Falling commodity prices have had less of an impact than might be expected on the current accounts and budgets of even the big commodity exporting countries Australia, New Zealand and Indonesia, and most of these countries have relatively extensive foreign currency reserves. In addition, with the exception of Malaysia, they are fairly unaffected by the recent depreciation of local currencies, which was substantial in some cases, because they hold relatively little debt denoted in foreign currency. It would therefore be an exaggeration at present to draw parallels with the Asian crisis of 1997. 

Figure 4: Sharp depreciation in currencies of emerging markets and commodity exporters
Figure 4: Sharp depreciation in currencies of emerging markets and commodity exportersSource: Macrobond
Figure 5: Share of potential crisis countries in global economy is limited
Figure 5: Share of potential crisis countries in global economy is limitedSource: Macrobond

Africa and Latin America are both important sources of commodities for the Chinese market and the drop in commodity prices will probably have more of an impact on these regions. Most Latin American countries are facing adverse economic conditions due to the decline in investments in mining and deteriorating confidence indicators, and they have only limited room for policies that could boost their economies. Many countries in the region already have a current account deficit. Brazil is already implementing austerity measures because the budget deficit has increased so much in recent years. Furthermore, most of these countries have actually become even more dependent on commodities in the past few decades, which suggests that it will not be easy for them to find new sources of growth. However, they do generally have considerable foreign currency reserves (with the exception of Argentina, Bolivia and Venezuela), which greatly reduces the immediate risk of crises. The situation in Africa, on the other hand, which is heavily dependent on commodity exports to China, is more worrying. Numerous countries have experienced substantial deterioration in their current accounts and budgetary positions while there is also downward pressure on currency reserves, which were already fairly low in some cases.

Although we expect the global effect of the sustained capital outflows and lower commodity prices to be relatively limited, they will cause major problems for some countries. The oil exporters Angola, Kazakhstan, Nigeria, Russia and Venezuela stand out in this regard but other vulnerable countries are Argentina, Brazil, South Africa, Turkey, Malaysia, Thailand and Indonesia. These countries suffer from combinations of a strong dependency on commodity exports, imbalances in the domestic economy, strong dependency on foreign capital inflows and/or political tensions. In a climate where there is increasing risk aversion to emerging markets, they could be the first victims of any increase in capital outflows. This could push their economies into crisis. With a combined share of about 11% in the global economy and 8% in global imports, their significance for the world economy is not huge but neither is it negligible.

Furthermore, the expected slowdown in growth and depreciation in the currencies of nearly all commodity exporting countries will put pressure on imports. The IMF is therefore now predicting that import growth in the emerging markets in 2015 will be less than import growth in developed countries, the first time this has happened in a long while. That will also slow down growth in developed countries slightly. 

Monetary policy in developed countries will remain loose for now

We expect monetary policy to remain loose in Western countries for the time being. The fall in commodity prices is further depressing inflation, which was already low. Given this downward pressure on inflation, we think that the Fed is more likely to implement its first interest rate increase in December rather than in September, although we are allowing for the possibility of the latter scenario. We expect any further increases to be introduced only very gradually. We also expect the United Kingdom to gradually start increasing the policy interest rate. At the same time, monetary policy will remain loose in the eurozone and Japan in view of the shaky economic recovery. However, additional policy-driven growth incentives are not likely from developed countries.

In China, on the other hand, we expect the government to implement some stimulus measures in an effort to prevent any further slowdown in economic growth. But this will not mean a return to the pattern in the past decade, when global demand received a strong boost from the huge increase in investment in residential construction and infrastructure in China. During this period, China’s current account surplus fell substantially from 10% of GDP in 2007 to 2.1% of GDP in 2014, while the real effective exchange rate rose sharply. The limits to the current growth model are becoming increasingly apparent. China will have to reform its economic model, which will mean a larger role in the economy for the less trade-intensive service sector. The country will also have to become accustomed to lower economic growth. Whatever happens, China will not be able to provide a boost to global economic growth to the same extent that it has done in the past few years.

All in all, this does mean that there is uncertainty about the state of the world economy. Economic growth will increase slightly in developed countries this year, mainly because of faster growth in the eurozone. However, this increase in growth is partly the result of temporary factors such as the falling commodity prices, which are boosting consumption. The recovery in the US, which has been in evidence for much longer, is continuing but it would be hard to call even the growth of the American economy impressive. We therefore expect the growth of the global economy to slow down slightly from 3,4% in 2014 to 3¼% this year, given that the upturn in growth in the developed world will only partially compensate for the slowdown in the emerging countries. We expect growth of the world economy to remain moderate at 3½% in 2016.


The Economic Quarterly is a publication of Economic Research (KEO) of Rabobank and a co-production with Financial Markets Research.

The views presented in this publication are based on data from sources we consider to be reliable. Among others, these include Macrobond. The economic growth forecasts are generated from the NiGEM global econometric structure models.

This data has been carefully incorporated into our analyses. Rabobank accepts, however, no liability whatsoever should the data or prognoses presented in this publication contain any errors. The information concerned is of a general nature and is subject to change.

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Abbreviations for sources: CBS: Statistics Netherlands, ONS: Office of National Statistics, OECD: Organisation for Economic Co-operation and Development, CPB: Economic Policy Analysis,  IMF: International Monetary Fund.

Abbreviations used for countries: VK: Great Britain (UK), IE: Ireland, US: United States, DE: Germany, IT: Italy, NL: Netherlands, ES: Spain, AT: Austria, FR: France, GR: Greece, BE: Belgium, FI: Finland, EZ: Euro zone, PT: Portugal.

Abbreviations used for currencies: CNY: Chinese yuan, IDR: Indonesian roepia, INR: Indian roepie, MYR: Malasian ringgit, KRW: South Korean won.

Economic Research is also on the internet: www.rabobank.com/economics

For more information, please call the KEO secretariat on tel. +31 (0)30 – 216 2666 or send an email to economics@rn.rabobank.nl

Allard Bruinshoofd, head of International Research, Economic Research
Tim Legierse, head of National Research, Economic Research

Graphics: Selma Heijnekamp and Reinier Meijer

Production coordinator: Christel Frentz

Herwin Loman
Rabobank KEO
+31 30 21 62666
Fabian Briegel
RaboResearch Global Economics & Markets Rabobank KEO

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