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In the wake of a number of disappointing economic releases, and with many prominent consumer goods companies reporting slowing sales in emerging markets in Q3, there is a danger of downplaying the growth potential of emerging markets – much in the same way that there is a danger of over-emphasising the strength of the recovery in advanced economies.
The current slowdown and the domestic and external issues facing major emerging markets do not, in my view, lessen the long-term potential of these economies for strong growth. Yes in the short-term we are seeing much slower rates of growth than we have been used to, and structural changes in many of these economies are leading to lower potential rates of growth, but these lower rates are still a cut above those of advanced economies, and most importantly, emerging markets deserve to be looked at on a case-by-case basis – even in the short-term there are some bright spots.
For all the talk of the resurgence of advanced economies and the weakening of emerging markets, growth in emerging and developing economies is still set to outpace advanced economy growth each year to 2020 and to be almost three times faster than advanced economy growth in percentage terms between 2013 and 2020. Of course these markets are starting from a lower base, and need to sustain higher rates of growth in order to absorb new entrants into the labour market, but the fact that they are forecast to add a combined US$13.2 trillion (in 2012 prices) to their GDP between 2013 and 2020 (compared to US$9.4 trillion between 2006 and 2013) should not be wholly disregarded.
Source: Euromonitor International from national statistics/Eurostat/OECD/UN/IMF
Although it would be naïve to believe that all markets will use the slowdown as an impetus for change, it is also likely that the deceleration will be a wake-up call for some and lead to structural reforms to drive growth. The fact that the Fed is delaying the beginning of the taper also gives emerging market governments more time to act.
It’s also an oversimplification, which has the potential to be self-fulfilling, to consider all emerging markets as being at risk. Colombia is benefitting from productivity gains and increasing domestic demand, Peru is boosting infrastructure and the Philippines continues to surprise on the upside, with strong growth in private consumption and investment spending. Poland and Chile are also held up as examples of emerging markets with strong macro-economic fundamentals.
There will be winners and losers from the current adjustment. As the IMF has outlined in its October World Economic Outlook, the road ahead remains bumpy. Uncertainty over the fallout from the Fed’s tapering (when it occurs) and the loosening of monetary policy which stronger advanced economy growth would bring about, continues to damage confidence in emerging markets.
Governments in emerging markets should use the slowdown to re-energise their reform programmes. Some would reason that if governments have not taken advantage of the good times to do this then it won’t happen now. But I would argue that there is far more incentive for reform today, with the threat of the reversal of recent gains in income and macro-economic stability hanging over governments if reforms are not implemented and competitiveness is not improved.