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).
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.
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