Reasons to expect the EM recovery to soldier on - Capital Economics
Emerging Markets Economics

Reasons to expect the EM recovery to soldier on

Emerging Markets Activity Monitor
Written by Edward Glossop
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High COVID-19 cases across parts of the emerging world have grabbed headlines over the past few months. But while these outbreaks will inevitably create bumpiness in the affected countries’ economic recoveries, large downturns should be avoided.

  • High COVID-19 cases across parts of the emerging world have grabbed headlines over the past few months. But while these outbreaks will inevitably create bumpiness in the affected countries’ economic recoveries, large downturns should be avoided.
  • The number of new COVID-19 cases recorded per day is climbing rapidly in Latin America, driven in part by Brazil, where a more transmissible new variant appears to be circulating. A new virulent variant in South Africa has also coincided with a surge in cases there since December. Infection rates elsewhere in sub-Saharan Africa are rising sharply too.
  • Meanwhile, although new cases have fallen sharply in much of Emerging Europe, in per capita terms they remain high across the region. (See Chart 1.) New infections in Czechia picked up again in January, and hospital admissions and ICU occupancy rates have both shot up.
  • While that all sounds pretty downbeat, there are reasons why steep economic contractions should continue to be avoided. First, restrictions on activity have generally been more targeted. Manufacturing sectors have remained open in Central & Eastern Europe (CEE), as well as Mexico. Indeed, industrial production in CEE in particular has been robust recently (see here for the case of Poland).
  • Second, policy remains supportive. Fiscal policy is still accommodative in most cases. And central banks have kept monetary conditions loose. Real interest rates are negative in many major EMs, and central banks in many countries are still implementing policies to encourage bank lending.
  • Third and related, external conditions have been supportive too. Strong risk appetite has supported capital inflows. And commodity prices – most notably oil – have risen further. Supportive external and domestic backdrops have kept financial conditions loose.
  • The picture is altogether brighter in parts of Asia, notably China. The economy entered 2021 with strong momentum. Moreover, restrictions to tackle a renewed COVID-19 outbreak could paradoxically boost growth over the Lunar New Year Holiday by forcing workers to stay close to workplaces.
  • Meanwhile, the continued fall in cases in India should allow restrictions there to be loosened further – albeit gradually – and the recovery to gain some momentum. And the authorities in Korea appear to have already controlled their small outbreak, so this shouldn’t derail the economic recovery. Growth in the likes of Vietnam, Singapore and Taiwan, which have largely controlled the virus, will remain robust.
  • All told, while EM activity data for Q1 and potentially Q2 will be a mixed bag, with some economies suffering renewed contractions, the declines should be relatively mild compared to Q2 2020. And GDP in many countries will continue to expand. Our forecasts for 2021 are generally above consensus. Even so, we still expect aggregate EM GDP to be stuck below its pre-virus path until at least end-22. (See Chart 2 and our recently published Q1 Emerging Markets Outlook.)

Chart 1: New Daily Cases (Per mn, Avg. Last 7d)

Chart 2: CE Real EM GDP vs. Pre-virus Path

Sources: Refinitiv, CEIC

Sources: Refinitiv, Capital Economics


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