Emerging markets have fared better than the developed world in the latest round of growth forecast cuts from the International Monetary Fund.

In its World Economic Outlook on Tuesday, the Fund cut the prediction for developed world 2011 GDP growth by 0.6 percentage points to 1.6 per cent, For the emerging markets it shaved off only 0.2 percentage points to 6.4 per cent.

But that’s almost beside the point. The bulk of the report is dominated by a gloomy assessment of global prospects in which, as the authors say, the “risks are clearly to the downside”.

In a key passage, the report says:

Downside risks to activity have increased noticeably since the June 2011 [World Economic Outlook] Update. Four types of risk deserve particular attention and revolve around (1) weak sovereigns and banks in a number of advanced economies, (2) insufficiently strong policies to address the legacy of the crisis in the major advanced economies, (3) vulnerabilities in a number of emerging market economies, and (4) volatile commodity prices and geopolitical tensions.

And, there’s no escaping the threat by hiding in some corner of the emerging markets:

Various market indicators confirm the qualitative assessment that downside risks are now much higher than in June or April 2011. A downside scenario illustrates how the major advanced economies could fall back into recession and what damage this could inflict on emerging and developing economies.

Looking at the emerging world in more detail, the IMF confirms that Asia will continue to grow strongly. But Latin America and central and eastern Europe will see deceleration:

Real GDP growth in emerging and developing economies during the second half of 2011 is expected to be about 6¼ percent, down from about 7 percent during the first half of the year. Emerging Asia is forecast to continue to post strong growth of about 8 percent, propelled by China and India. In Latin America, growth is expected to moderate to 4 percent in 2012, from about 6 percent in 2010, as external demand slows and tighter macroeconomic policies begin to rein in strong domestic demand. With the
rebound in the CEE and CIS regions losing some vigor in 2012, particularly in Turkey, real GDP growth in emerging and developing economies is expected to settle at about 6 percent.

But, says the IMF, don’t forget about inflation, with the authors admitting that this is something that they have got wrong in the past:

The IMF’s Inflation Tracker confirms that inflation pressure is still relatively elevated, especially in emerging and developing economies. …In the major advanced economies, however, headline and core inflation appear to be losing some momentum. However, prospects are very uncertain, and previous forecasts based on futures markets have not proven accurate. Risks for prices are still tilted toward the upside. Emerging and developing economies are more likely to experience second-round effects on wages from past food and energy price hikes, because these account for a larger share of their consumption baskets.

The Fund says that although credit growth has eased in China, key countries have seen high growth including Brazil, Colombia, Hong Kong SAR, India, Indonesia, Peru, and Turkey.

Financial stability risks in all these economies must be monitored for some
time, given the sheer volume of credit growth over the past five years.

Nor should the risks of external shocks be underestimated, says the IMF:

So far, buoyant credit and asset price growth in emerging and developing economies has not led to a sharp acceleration in domestic demand or a
precarious widening of current account imbalances.
However, vulnerability is beginning to build, especially in economies where credit is spurred by capital inflows. A key reason for the limited increase in current account deficits is the recovery in commodity prices. In fact, the current account surpluses of emerging and developing economies have been rising during the recovery, from 1½ percent of GDP in 2009 to 2½ percent in 2011.

Energy-exporting Middle East economies account for the bulk of this widening, followed by CIS economies. But Latin America has seen a widening of deficits, from ½ percent to 1½ percent of GDP. And so has Turkey, where the level is “disconcerting.”

Coming at a time when emerging market currencies have been dropping this is a sobering report – particularly for those countries, including Turkey, dependent on foreign capital inflows. There will be much to discuss in Washington over the next few days, and not all of it will be about the eurozone.

Related reading:
Latin America well placed to survive slowdown, FT
Increasing Macroeconomic Fright, FT Alphaville

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