2020: a better year in store for most emerging economies
A trade deal, even if only a truce, is a better backdrop for emerging markets (EM) than full-blown trade tensions between the US and China. This prompts some growth upgrades, though in India domestic troubles continue to conspire to overwhelm the more favourable external backdrop. Overall, the story of 2020 should be one of acceleration for most EM, with inflation still contained.
We expect most emerging markets to improve
Moving into 2021, we mainly expect a continuation of the 2020 growth story given the negative output gaps in the region. In China, inflation is likely to begin to climb as output gaps are filled.
EM central banks have mostly surprised to the dovish side in 2019, prompting downward revisions for rates as we continue to test the waters for the new neutral interest rate. China is an exception, with the People's Bank of China (PBoC) turning more cautious and also looking to other monetary policy instruments.
Inflation is still soft, allowing ever greater easing from central banks
We see room for limited further easing in the BRIC economies in 2020. However, we expect central banks to largely keep rates on hold or even look to hike towards the end of 2021 as inflationary pressures pick up.
A truce in trade tensions provides some breathing room for China, and should allow for a better performance from trade and industrial production than we had previously forecast. This results in an upgrade to our Schroders China Activity Indicator (SCAI) for 2020 of around 40 basis points.
In terms of the official growth rate, we have not altered our 2020 number, having also left it unchanged at 6% at our last update.
The income target for 2020 actually requires 6.2% growth in 2019 and this year, so if anything, we may have upside risk to the GDP number. However, a review of historic GDP data will likely revise higher existing GDP, reducing the growth needed for 2020.
A better outlook for trade boosts Chinese investment and production
In some ways, more interesting at this point than the trade tensions or the 2020 outlook and its mix of stimulus, is what happens to Chinese growth and policy in 2021. Having achieved its goal of doubling per capita incomes from 2010, we think the Chinese government will next seek to move away from binding growth targets.
2020 is likely to be the last year with a binding growth target
We do not mean to suggest the government will cease to care about growth. However, it is more likely to focus on the parts of economic growth that the populace cares about; employment. There is also likely to be more attention paid to quality of life, not only pollution but the provision of better quality social services, particularly in rural areas.
Inflation unlikely to abate until the second quarter
Inflationary pressures continue to rise, prompting an upward revision for last year and 2020. Pork prices are currently growing at over 100% year-on-year (y/y), and this seems unlikely to peak before the Chinese New Year holiday at the end of January.
The good news for the PBoC, however, is that core inflation pressures are very weak and so there is little real need to hike. We would expect the central bank to look through high headline inflation and focus on activity and core inflation measures when deciding monetary policy; both of these warrant further easing over the next 24 months.
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