Recoveries entering a slower phase, China an exception - Capital Economics
Emerging Markets Economics

Recoveries entering a slower phase, China an exception

Emerging Markets Activity Monitor
Written by Edward Glossop
Cancel X

The latest activity and mobility data indicate that the EM recovery has lost some steam in recent months and we expect the pace of recovery to remain slow-going in the coming quarters. The main exception is China, where the recovery looks set to stay strong.

  • The latest activity and mobility data indicate that the EM recovery has lost some steam in recent months and we expect the pace of recovery to remain slow-going in the coming quarters. The main exception is China, where the recovery looks set to stay strong.
  • After two consecutive months of strong gains, industrial production and retail sales growth weakened in most EMs in July. (See Charts 1 & 2.) Available figures for August have also been disappointing – industrial production growth slowed in Russia and Poland, and contracted in Korea. Meanwhile, in most countries, although there has been a further pick-up in the mobility indicators in September, the improvement has been modest. In short, the big gains from opening up after national lockdowns have been exhausted.
  • At a country level, our new China Activity Proxy suggests that output is already back to its pre-virus path. Recoveries in Taiwan, Vietnam and Turkey have also been strong, and output is at or close to its pre-virus level (though not its pre-virus path). At the other end of the spectrum, based on the latest activity data, we estimate that output in Mexico, South Africa, Thailand and Argentina remains 8-10% below pre-virus levels.
  • We expect recoveries in most EMs to continue at a slower pace in the coming quarters, for a few reasons. First and most obviously, COVID-19 cases are still high in many EMs. India is now the epicentre of the pandemic and, while new cases in parts of Latin America have fallen, they remain elevated. That will keep consumers and businesses cautious and restrictions relatively tight.
  • What’s more, second waves are getting worse in Central & Eastern Europe and North Africa. Admittedly, the economic damage caused by these second waves should be smaller than the first waves, with healthcare systems better prepared and national lockdowns therefore more likely to be avoided. Even so, fear of catching the virus and localised restrictions will still weigh on demand.
  • Second, the economic recovery in developed economies is stuttering. The second wave of COVID-19 cases (and associated restrictions on activity being imposed) in the Eurozone and other DMs will weigh on heir recoveries in particular. But more generally, September’s batch of flash PMIs were weak across the board, even in DMs where virus numbers are falling. Weaker external demand will weigh on the recoveries in the highly open economies in Central & Eastern Europe and Asia in particular.
  • The key exception to this slower recovery story is China, where we expect growth to remain above trend in the coming quarters. Supportive fiscal policy will remain a tailwind for industry and construction. Meanwhile, service sector activity should continue to recover on the back of the tightening labour market and improving consumer confidence. Elsewhere in Asia, strong recoveries in Vietnam and Taiwan should continue, with both countries controlling the virus and benefitting from the US-China trade tensions.
  • We’ll be firming up our forecasts in our forthcoming Q4 Outlooks. But for now, we continue to expect parts of Asia (China, Vietnam and Taiwan) to experience the swiftest recoveries. In contrast, India, Argentina, and Mexico will be notable underperformers, with output set to be 5-10% below pre-virus paths even by end-2022. And while Turkey’s economic recovery has been strong so far, the imbalances that this has created are sowing the seeds for a fresh crisis.

Chart 1: Industrial Production (s.a., % m/m)

Chart 2: Retail Sales (s.a., % m/m)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics


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