Digging into the divergences in the latest activity data - Capital Economics
Emerging Markets Economics

Digging into the divergences in the latest activity data

Emerging Markets Activity Monitor
Written by Edward Glossop
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The latest activity data continue to show a divergence across countries, but also sectors. Consumers have generally driven recoveries in parts of Latin America, while manufacturing has been the main area of strength in much of Emerging Asia and Emerging Europe. Recent sharp increases in new COVID-19 cases in many EMs make the outlook for the next few months challenging, particularly for their services sectors.

  • The latest activity data continue to show a divergence across countries, but also sectors. Consumers have generally driven recoveries in parts of Latin America, while manufacturing has been the main area of strength in much of Emerging Asia and Emerging Europe. Recent sharp increases in new COVID-19 cases in many EMs make the outlook for the next few months challenging, particularly for their services sectors.
  • The recovery across emerging markets remains uneven. Year-on-year growth appears to have been rapid at the start of Q4 in Chile and Turkey and, to a lesser extent, Brazil, China, Taiwan and Vietnam. (See Chart 1.) Note that the figures for Turkey and Chile have been flattered by base effects. In contrast, recoveries in the likes of Mexico, Russia, South Africa and Peru (bottom left) are lagging.
  • And the composition of recoveries has differed across EMs. In Brazil, for example, the recovery has been boosted by consumer-facing sectors – retail sales have been much stronger than industrial production. This seems to reflect the nature of policy support, which has focused on cash payments to households.
  • In contrast, industry has been the main area of strength in much of Central and Eastern Europe (CEE) as well as China, Vietnam and Taiwan. (See the left-hand side of the dashed line in Chart 1.) These economies have been able to capitalise on the shift in global demand away from services and towards goods.
  • The next few months are likely to be extremely challenging for many economies (particularly their services sectors). New daily COVID-19 cases have risen sharply across a range of large EMs, including Brazil, Mexico, South Africa and Korea. So far, our Mobility Trackers (which are based on daily figures and run to the middle of this month) don’t show a significant drop-off in activity in those economies.
  • However, with governments tightening restrictions, it may just be a matter of time before the economic hit comes through. Indeed, as we noted in our previous Activity Monitor, the second waves that hit Eastern European countries earlier in Q4 will probably result in a contraction in GDP this quarter.
  • The prospect of the roll-out of effective vaccines in the coming months does, of course, brighten the outlook further ahead. We looked at this in detail in a recent Focus and there are three points to highlight here. First, the direct economic boost from vaccines is likely to be largest in those economies which have greater access to vaccines and that are currently suffering a heavy economic burden from the virus. This includes much of CEE and Chile. (See Chart 2.)
  • Second, paradoxically, China’s economy is unlikely to benefit from vaccines. The virus has been effectively stamped out there, and the tailwind from strong external demand for pandemic-related goods, such as PPE and home-working equipment, is likely to reverse as vaccines are rolled out elsewhere. Even so, continued policy support and strengthening household spending means its economy will continue to surprise on the upside in 2021. (For more, see our China Update.)
  • Finally, while Brazil and Turkey have been economic outperformers this year, policy tightening (fiscal in the former, monetary in the latter) means they will fall behind in the EM recovery, irrespective of vaccines.

Chart 1: Retail Sales & Industrial Prod (October, % y/y)

Chart 2: CE Mobility Trackers & Confirmed Vaccine Pre-orders from Pharmaceutical Companies

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Google, Duke GHIC, Capital Economics


Edward Glossop, Senior Emerging Markets Economist, edward.glossop@capitaleconomics.com