Taking stock of the EM recovery - Capital Economics
Emerging Markets Economics

Taking stock of the EM recovery

Emerging Markets Activity Monitor
Written by Nikhil Sanghani
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The latest hard data, and our Covid Recovery Trackers, suggest that the downturn in EM GDP bottomed out in April and activity is now edging higher. But the recovery is uneven, with rebounds strong in parts of Emerging Asia and Emerging Europe, and much more tentative in Latin America and India – where the virus continues to spread rapidly.

  • The latest hard data, and our Covid Recovery Trackers, suggest that the downturn in EM GDP bottomed out in April and activity is now edging higher. But the recovery is uneven, with rebounds strong in parts of Emerging Asia and Emerging Europe, and much more tentative in Latin America and India – where the virus continues to spread rapidly.
  • Let’s start with the terrible April activity figures. Our measure of EM aggregate retail sales and industrial production fell by 13.7% y/y and 17.5% y/y respectively in that month, far worse than the troughs during the Global Financial Crisis. (See Chart 1.) Chart 2 plots the April data at a country level. The largest contractions came in Latin America (see the light blue diamonds). Peru’s economy was hit hardest, as the stringent lockdown there brought manufacturing, mining and construction to a near standstill.
  • Emerging Europe fared slightly better (see the dark grey diamonds). Most countries in the region suffered falls of around 20-30% y/y in retail sales and industrial production. Emerging Asian economies did better still (see the dark blue diamonds). China’s economy was recovering by April, while Korea and Taiwan were able to contain their coronavirus outbreaks without shutting down large sections of their economy. India is a notable outlier in the region. Industrial production there plunged by 55% y/y in April, on a par with Peru.
  • The good news is that April probably marked the trough in EM activity. Many countries began lifting lockdowns in May, and some of the hard activity data were a bit better in that month. Admittedly, Russia’s industrial production fell by 9.6% y/y in May, greater than the 6.6% y/y drop in April, primarily due to greater oil output cuts. But the contraction in Polish industrial production and retail sales eased markedly last month, as did vehicle sales in most EMs. (See Chart 3.) And China’s economy rebounded strongly in May (see Chart 4), with output in many sectors returning to their 2019 levels.
  • Our new Covid Recovery Trackers point to a further improvement in June. These composite indicators are a simple average of daily series covering four aspects of economic activity: retail & recreation; being in the workplace; driving; and public transport usage. These Trackers intend to shed light on where activity is relative to pre-virus levels to give us a sense of whether conditions are getting better or worse. They will be updated weekly on our dedicated coronavirus webpage.
  • In all cases, our Trackers are now higher than their troughs. But the recoveries have been uneven across countries. EMs which have successfully reduced the spread of the coronavirus are closest to pre-virus levels of activity. This includes the likes of the Czech Republic, Vietnam, Taiwan and Korea. At the other end of the spectrum, new virus infections continue to rise rapidly in parts of Latin America and India (see Chart 5), and activity there is still very weak. (See Chart 6.)
  • Related to this, the rebound in our Recovery Trackers is correlated with the extent to which restrictions have been eased. (See Chart 7.) Accordingly, activity should continue to recover across the emerging world as most policymakers are loosening lockdowns. This includes countries which are still grappling with the virus. The one exception is Chile. The government there has doubled down on its lockdown in an attempt to stamp out the virus, which will continue to weigh on activity in the near term.
  • However, even with lockdowns being lifted, the economic outlook is still bleak for countries struggling to contain their virus outbreaks. As we explored in this Update, people are likely to practise social distancing for longer, tourism sectors will be hit harder, and there could be greater levels of illness and labour absenteeism in Latin America and South Asia over the coming years.
  • Overall, it appears that parts of Latin America and India suffered some of the largest peak-to-trough falls in activity. And with coronavirus cases there continuing to spread rapidly, the level of activity will take longer to recover than in places which have already contained the virus. That’s why we think real GDP will generally be furthest away from pre-virus trends by the end of 2022 in these economies. (See Chart 8.)

Chart 1: EM Retail Sales & Industrial Production (% y/y)

Chart 2: April Retail Sales & Ind. Production by Country

Chart 3: Auto Sales (% y/y)

Chart 4: China Activity & Spending Indicators (% y/y)

Chart 5: Daily New Coronavirus Infections

Chart 6: CE Covid Recovery Trackers (% Difference from Jan.-6th Feb. Median Level, 7-day Moving Averages)

Chart 7: Change in Stringency Index Since Peak Lockdown vs. Change in Trackers Since Activity Trough

Chart 8: CE Real GDP Forecast at End-2022
(% Difference from Pre-Virus Forecast)

Sources: Refinitiv, CEIC, Oxford University, Apple, Capital Economics


Nikhil Sanghani, Assistant Economist, nikhil.sanghani@capitaleconomics.com