Slowdown in Rapid-growth Markets to Be Short-lived

July 11, 2012 /

Economic expansion in the 25 leading rapid-growth markets (RGMs) has started to slow sharply since the beginning of this year but this will only be a temporary blip according to Ernst & Young’s quarterly Rapid-Growth Markets Forecast (RGMF) released today.

RGMs, particularly in Asia, have the necessary tools available to ease both fiscal and monetary policy allowing growth to resume towards the end of the year.

Even with a slowdown in growth, RGMs are likely to weather the Eurozone crisis and will remain the engines of global growth. GDP is forecast to expand by 4.9% this year in stark contrast to the 0.6% contraction, at best, that is expected in the Eurozone. Output in the RGMs is expected to continue to pick up by 6% in 2013 and 6.5% in 2014.

However, there is a mixed picture emerging across the world. Asia and Africa continue to remain resilient but Central and Eastern Europe and Latin America are hindered by the slow growth in their key export markets of the Eurozone and United States respectively. If the Eurozone were to fall further into recession, RGMF predicts that the Czech Republic and Poland would be pushed into recession, with Hong Kong and Malaysia also hit hard due to their dependence on global trade.

Carl Astorri, Senior Economic Adviser to Ernst & Young’s Rapid Growth Markets Forecast explains, “The RGMs are well placed to weather the major risks facing the global economy at the present time, given that they have the space to relax fiscal and monetary policy. This has already happened in some RGMs including in all of the BRICs. It is likely that there will be further easing of monetary policy in the months ahead, particularly if the global economy deteriorates further.”

Alexis Karklins-Marchay, Co-Leader of the Emerging Markets Center at Ernst & Young comments, “Although slower expansion in the rapid-growth markets is likely this year it will only be a blip and we will see a return to significant growth towards the end of the year. Soaring domestic demand in economies starved, for some time, of investment and consumption will offer business exciting new markets for goods and services in the years ahead.”

Growing consumer markets to protect RGMs

As well as having the option of easing fiscal and monetary policy to accelerate growth, RGMs are also fortunate enough to have a growing middle class with increasingly higher incomes and an appetite to spend. RGMF forecasts that the number of households in RGMs enjoying higher incomes will grow sharply over the next ten years. The number of RGM households receiving an income of over US$30,000 will more than double reaching 149m by 2020, overtaking the US (120m) and the Eurozone (116m).

The growth in household incomes will lead to increased consumer spending. In 2011, two-thirds of consumer spending across the world came from the advanced economies, with the remaining third coming from the emerging markets. However, in 25 years time emerging Asia alone will have overtaken the advanced economies as the key source of consumer spending, responsible for almost 40%.

Alexis continues, “Consumer demand from RGMs will eventually replace the advanced economies as the key driver of global growth. The shift in import demand should also assist in rebalancing the economy.”

Rebalancing required

The rapidly growing Asian countries are enjoying more prominence in the world economy. This places greater importance on the role these countries must play in efforts to rebalance the global economy. Those countries that have run surpluses in recent years must adjust their growth patterns toward more reliance on domestic demand and should allow greater exchange rate flexibility.

Alexis comments, “Rebalancing Asian RGMs will not only make the world economy more stable but will also help the Asian countries themselves, making higher growth rates more durable. By increasing private consumption and investment and infrastructure spending, large gains can be made across Asia.”

As the RGMs develop, demand for services in these countries will increase sharply. The three key segments of the services market are financial, business and insurance; social security; and wholesale. Across the world, emerging markets currently account for less than a quarter of the services sector globally. But in 25 years’ time, it is estimated that emerging markets will make up more than 40% of the services sector across the world. Foreign direct investment (FDI) is now also beginning to shift focus away from manufacturing towards the services sector as it grows in importance.

Foreign investors drawn to RGMs

The current bout of the Eurozone crisis will have a negative impact on FDI into RGMs during 2012, with RGMF predicting a possible drop of 10%. However, longer-term FDI will continue to grow as companies are drawn to the high growth rates of the RGMs when growth is stagnant elsewhere in the world. In the short-term weakness will be particularly apparent in the European economies with Central and Eastern Europe being hit hardest. But FDI into Russia and India could also lose momentum.

It is already evident that foreign investors are also beginning to spread their investments across the globe and that FDI is becoming more broad-based. In 2010 the majority of the overall increase in FDI was generated by just three countries – China, Brazil and Indonesia. However, in 2011 substantial increases were also recorded by Turkey and Colombia as well as Indonesia and all of the BRICs.

Looking ahead

Alexis concludes, “Despite the slowdown in growth experienced by the RGMs at the beginning of this year they will begin to bounce back towards the end of this year and in 2013. The ability to relax policy to boost growth, a growing middle class to aid consumer spending and a strong rise in FDI flows will ensure continued growth well into the future.”

 

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