TalkingEconomics: Emerging markets forecast update - diverging fortunes

Craig Botham

Craig Botham

Senior Emerging Markets Economist

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We downgrade growth for most of the BRIC economies, with the exception of China. We expect lower inflation than last quarter thanks to softer commodity prices, lower growth and surprisingly low inflation in the first quarter.

China: finally deleveraging?

Q1 GDP growth beat expectations but while the services sector is still the fastest growing part of the economy, heavy industry seemed to propel the upside surprise in Q1, a worrying return to a reliance on “Old China”. Efforts to contain leverage have escalated this year and there are definitely some tentative signs of deleveraging, but credit is still outgrowing GDP. There is scope for looser fiscal policy to compensate for the tighter monetary stance, although it increasingly seems that this burden rests with central government. We forecast GDP growth of 6.6% in 2017 (no change from last forecast) and inflation of 2% (versus 2.5% previously).

Brazil: thrown back into turmoil

Following reports that President Temer has also been caught up in the Brazilian corruption saga, an indirect election (in which Congress selects a new president to serve the remainder of this term) seems the most likely outcome. This will, however, be negative for reform progress while the tentative economic recovery that had been seen since President Rousseff’s removal seems at risk. Consequently, we downgrade growth expectations (to 0.2% from 0.7% in 2017), but also slightly increase our expectations for policy easing.

Russia: oil to weigh on growth

Although we still expect growth to accelerate from current levels, we think that a weaker oil price will weigh on activity compared to our last forecast. As such, we expect GDP growth of 1.1% in 2017 (compared to 1.6% previously). We anticipate that rates will end the year at 8.25% as frontloading of the cycle continues. Our expectation for 2018 rates remains unchanged at 8%. On the political front, wary optimism is building once again on the prospect for reforms but past experience suggests investors should not get too carried away.

India: impact of tax changes uncertain

After many, many years, India is on the verge of implementing the Goods and Services Tax (GST). The move is likely to be positive for growth in the medium- to long term (but disruptive in the short term) and to lower rather than raise inflation (according to work by HSBC). We expect rates to stay on hold, though continued inflation improvements would generate greater pressure for rate cuts.