TalkingEconomics: EM forecast update - downward revisions
The Brazil, Russia, India and China (BRICs) paint a weaker picture this year as domestic concerns and falling commodity prices take their toll. 2016 looks brighter but the skies are still mainly cloudy for these emerging markets (EM).
11 September 2015
China: shaky foundations
China’s second quarter GDP growth was driven by a strong performance from the financial sector, as a result of the rally in the stockmarket.
With weaker equity market performance likely in the rest of the year, and ongoing soft economic data, a relative slowdown in the second half should see growth in 2015 finish below 7%.
For 2016, we expect a weaker year-on-year performance by the financial sector to weigh on growth in the first half of the year. We therefore assume an increase in government stimulus: we see additional reductions in the reserve requirement ratio (RRR) of a further 50bps this year, and 150bps next year, such that the RRR ends 2016 at 16%.
We finalised our forecast ahead of the decision by the People’s Bank of China (PBoC) to alter the way in which it fixes the yuan, which resulted in a 2% overnight depreciation. We do not believe this is a policy aimed at providing stimulus to exporters: total depreciation of 3% since the change will not see a boom in Chinese exports.
Far more important is the increased role of the market in determining the value of the currency. Consequently, we see this more as a reform aimed at internationalising the yuan by including it in the basket of currencies that makes up the International Monetary Fund’s (IMF) Special Drawing Right , rather than a reform aimed at boosting growth.
Brazil: battered by a perfect storm
The ongoing corruption scandal, the threat of a ratings downgrade, soft commodity prices and a depreciating local currency means the growth backdrop in Brazil continues to deteriorate. We now forecast growth of -2% in 2015 and -0.1% in 2016.
Furthermore, with the current political paralysis, we find it hard to see a turning point for Brazil; we could be looking at several years of weak growth.
India: political deadlock a concern
We have downgraded Indian growth slightly this year to 7.3% thanks to weaker data so far. We have also been disappointed by reform progress as the monsoon session of parliament ended with no laws passed.
On the positive side, inflation pressures remain weak (by Indian standards) and we remain of the view that another rate cut (25bps, to 7%) will be forthcoming this year. After that, however, rates will likely remain on hold in 2016.
Russia: same old story
Russian growth has performed more of less as expected so far, and we expect GDP to contract by 4.1% in 2015. The central bank will likely feel comfortable cutting rates a little further, given the rapid cooling of inflation and the collapse in activity.
Still, one eye will be kept on the oil price, so we do not expect a huge amount of monetary easing from this point. Looking at next year, we expect growth to improve to -0.1% but the lack of investment which results from such cheap oil will weigh on growth for some time to come.
For more articles on the outlook for the global economy why not try:
Or download the full September Economic Infographic below:
Important Information: The views and opinions contained herein are those of Schroders’ Investment team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. UK: Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA, is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. Further information about Schroders can be found at www.schroders.com US: Schroder Investment Management North America Inc. is an indirect wholly owned subsidiary of Schroders plc, a SEC registered investment adviser and is registered in Canada in the capacity of Portfolio Manager with the Securities Commission in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan providing asset management products and services to clients in Canada. 875 Third Avenue, New York, NY, 10022, (212) 641-3800. www.schroders.com/us