The outlook for emerging markets has improved in recent weeks, but we still expect a relatively slow and bumpy economic recovery over the next 12-18 months.
- The outlook for emerging markets has improved in recent weeks, but we still expect a relatively slow and bumpy economic recovery over the next 12-18 months.
- The raft of Q4 GDP data released so far have been encouraging. Despite tighter social distancing restrictions in many cases compared to Q3, countries generally recorded positive q/q growth rates. Moreover, the outturns have in most cases been better than anticipated, particularly in Emerging Europe (excluding Poland), as well as parts of Latin America and Emerging Asia. (See Chart 1.) In a similar vein, Citibank’s widely followed “economic surprise index” for emerging markets (which gauges the extent to which incoming activity data are beating consensus expectations) is running at close to a record high.
- There have been several other positive developments recently too. In line with the global trend, new COVID-19 infections are falling in most EMs. The decline has been particularly dramatic in India, Colombia and South Africa. But in pretty much all EMs, cases are significantly lower than they were a few months ago. Meanwhile, after a slow start compared to most developed economies, vaccination programmes are starting to get underway in many major EMs.
- On the external front, commodity prices have surged over the past couple of weeks. Oil prices are up by 15% so far this month, while copper prices have shot up to levels not seen since the height of the commodities boom in 2011. This has lifted optimism about growth prospects in the large natural resource producers in Latin America, Africa and the Middle East.
- Despite these developments, we still expect a pretty weak EM economic recovery over the next year or so. For a start, although COVID-19 cases have generally fallen and vaccination programmes are underway, restrictions will need to remain tight for some time yet. Cases are still very high in per capita terms across Latin America and Emerging Europe in particular. And it will take at least until the middle of the year for most major EMs to vaccinate their vulnerable populations. If anything, restrictions in some countries (Brazil, Poland) are more likely to be tightened than loosened in the very near term.
- Meanwhile, although commodity prices have surged recently, we think talk of another “supercycle” is overdone. In fact, we expect the prices of many commodities – with the important exception of oil – to fall back in the second half of this year as China’s economy slows.
- Finally, while some DM governments are starting to flesh out plans to reopen their domestic economies, international travel restrictions are likely to remain in place for longer due to concerns about importing more cases and new virulent strains. Prolonged international travel restrictions will weigh on recoveries in the likes of Thailand, Turkey, Morocco and Egypt.
- At face value, our view that the EM recovery will be weak flies in the face of our chunky 2021 GDP growth forecasts, which are generally above consensus. But in most cases, these eye-catching figures partly reflect the statistical carryover from last year rather than underlying gains in GDP this year. (See Chart 2.) We expect the level of EM GDP to remain below its pre-virus path until at least end-22.
Chart 1: Q4 2020 GDP (% y/y)
Chart 2: CE 2021 GDP Growth Forecasts* (%)
Sources: Refinitiv, Bloomberg
Sources: Refinitiv, Capital Economics
Edward Glossop, Senior Emerging Markets Economist, firstname.lastname@example.org