TalkingEconomics: Emerging markets - trying to look on the bright side
Although 2016 is likely to be another tough year for the BRIC economies, there are signs that 2017 will see an improvement, overall. The worst is probably behind us in Russia and Brazil. China though will continue to slow down, but avoid crisis for now.
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China: slowing, but still no crisis call
Better-than-expected Q1 GDP in China has led to a mechanical uplift to our growth forecast for the year, to 6.4%. However, we maintain our overall growth path and shy away from the more bullish path of raising growth numbers on expectations of high levels of stimulus.
Furthermore, we are already seeing some signs of growing corporate stress, and believe this could prove a further headwind. The authorities appear to have changed course on the currency, expressing a clear preference for a weaker currency and we expect depreciation this year and next, to CNY 6.7 and CNY 7 respectively.
Brazil: hope as political turmoil recedes
Markets finally got the change of government they had been hoping for in Brazil, as the senate voted for the impeachment trial of then-President Dilma Rousseff in May. Attention now turns to whether the new government can deliver a change of policy direction.
We downgraded our 2016 growth forecast to -3.5% following a disappointing Q1 but maintain a more positive outlook for 2017. Meanwhile, inflation looks, at last, to be easing, and in the absence of any inflationary shocks, we expect rate cuts to begin sometime in Q3.
These rate cuts, in combination with better policy from a new government, should facilitate the recovery to 1% GDP growth we expect in 2017.
The Indian government is slowly gaining the political upper hand and reforms continue at a modest pace. Favourable monsoon conditions should result in a better harvest, which can compensate for weaker manufacturing, and help both growth and inflation, which for 2016 we expect at 7.5% and 5.4% respectively.
Russia: rumbling no more
The Russian economy appears to be weathering the oil price slump better than anticipated with Q1 GDP having surprised positively. We still expect a small negative for growth this year (-0.1) but a return to positive growth in the near future seems likely.
Meanwhile, assisted by a modest rouble recovery, inflation has been trending lower and we anticipate 200bps of cuts this year. Oil shocks or a much stronger growth profile would lead us to review our inflation and monetary policy outlook.