Sheets of five dollar notes sit on a pallet before being printed with a serial number at the Bureau of Engraving and Printing in Washington, D.C., U.S., on Tuesday, April 23, 2013. Stocks rallied amid growth in U.S. home sales, better-than-forecast earnings and speculation the European Central Bank will cut interest rates. U.S. equities recovered after briefly erasing gains following a false report of explosions at the White House. Photographer: Andrew Harrer/Bloomberg
The threat of greater trade protectionism in the US and China could prompt emerging countries to trade more with each other © Bloomberg

Emerging market economic growth will fall to its weakest level since the height of the global financial crisis this year, according to the IMF, in a big cut to its forecasts.

Full year emerging market-wide growth is projected to come in at 4.1 per cent, a decade low and the second-weakest figure since the dotcom bust of 2002, rather than the 4.4 per cent the IMF pencilled in as recently as April.

The gloomy forecast is just the latest in a series of swingeing downgrades by the Washington-based body. In October last year it projected emerging market growth of 4.7 per cent in 2019, while in April last year its forecast for the current 12 months was a rosy 5.1 per cent.

They come amid rising concerns about the future of globalised supply chains and weakening productivity growth in the developing world, which are calling into question the logic for investing in emerging economies.

The downward revisions in the IMF’s quarterly World Economic Outlook update are concentrated almost entirely in the developing world. Growth has been revised up a fraction in advanced countries, to 1.9 per cent, but down a notch in the world as a whole, to 3.2 per cent.

With the exception of emerging Europe, growth forecasts have been cut in every region of the developing world, led by a dramatic slump in Latin America and the Caribbean, where output is now expected to expand by just 0.6 per cent this year, less than half the 1.4 per cent pace projected three months ago and barely a fifth of the 2.8 per cent rate forecast in April 2018.

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The IMF cited “uncertainty” about pension and other structural reforms in Brazil, “policy uncertainty, weakening confidence and rising borrowing costs” in Mexico and economic contraction in Argentina for its deepening pessimism.

Likewise the region encompassing the Middle East, north Africa, Afghanistan and Pakistan is expecting to chalk up lacklustre growth of just 1 per cent, rather than 1.5 per cent, a far cry from the 3.7 per cent envisaged in April last year.

The prime driver is Iran, which is projected to contract at an even faster pace than the 6 per cent decline forecast in April, amid a tightening of US sanctions.

Forecasts have also been shaved for the Commonwealth of Independent States, in the wake of Russia’s economy contracting 0.4 per cent in the first quarter, and sub-Saharan Africa, where South Africa suffered a disastrous annualised 3.2 per cent quarter-on-quarter contraction in the March quarter as strike activity and blackouts hit the mining sector and agricultural output also fell.

Emerging Asia, the powerhouse of the developing world, is likely to hold up better, however, despite China being engulfed in a deepening trade war with the US.

Even though the IMF has trimmed its growth forecasts for China, India and south-east Asia, emerging Asia as a whole is still seen expanding by 6.2 per cent this year, just a tenth of a point below its April projection.

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To some extent the region is exporting its pain, however, with Chinese output being boosted by soft imports, which have tumbled nearly 8 per cent year on year in recent months, the IMF said.

In contrast, growth forecasts for emerging Europe have been revised up by 0.2 percentage points to 1 per cent, following an unexpected return to growth in Turkey in the first quarter.

Even here, though, the mood is dark: even 1 per cent growth would represent a sharp slowdown from 3.6 per cent in 2018 and 6.1 per cent in 2017. Moreover, although the IMF sees a pick-up to 2.3 per cent next year, this is still half a point less than it envisaged in April, largely due to continuing worries about the health of Turkey.

Across emerging markets as a whole, growth is expected to recover to 4.7 per cent in 2020, a tenth of a point below the April forecast.

The IMF called on central banks in the emerging world, as well as those in developed markets, to loosen monetary policy to support the recovery.

“Across emerging market and developing economies, the recent softening of inflation gives central banks the option of becoming accommodative, especially where output is below potential and inflation expectations are anchored,” it said.

This month alone South Africa, Ukraine, Indonesia and South Korea have cut interest rates, joining the likes of Chile, Egypt, India, Malaysia, the Philippines and Russia, which had already eased policy earlier in the year.

The IMF’s gloomy prognosis brings it more into line with private sector forecasters.

Oxford Economics is pencilling in emerging market-wide growth expectations of 4.1-4.2 per cent this year, while Capital Economics estimates that growth will slow to just 3.8 per cent, in large part because it believes the Chinese economy will in reality expand by just 5 per cent, rather than the 6 per cent-plus figures regularly touted by Beijing.

“It’s going to be a pretty disappointing year. Outside of the global financial crisis we have really only seen [growth this weak] during the 2015-16 slowdown and after the dotcom bust,” said William Jackson, senior emerging market economist at Capital Economics.

Nafez Zouk, lead emerging market economist at Oxford Economics, said: “Looking at the large, liquid EMs, no one really seems to be able to do well,” with even previous bright spots such as China and eastern Europe now slowing, with the latter’s fortunes tied to the spluttering eurozone.

Mr Jackson put much of the blame on South Africa, Brazil, Russia and Mexico, which all “had a really terrible start to the year” due to factors such as a catastrophic dam collapse at a Brazilian iron-ore mine that killed 240 people and severely hit mining output, and an increase in value added tax in Russia that crimped activity.

Although these factors are idiosyncratic, Mr Jackson said a common strand was that these countries are all commodity exporters that “are struggling to adjust to low commodity prices. They have been stumbling along so it doesn’t take much to knock them off course”.

With Argentina and Turkey also experiencing “deep recessions”, Mr Jackson said it was “unusual that so many economies have been so weak”.

Nevertheless, with much of the slowdown due to “temporary factors that are not likely to be repeated,” he suggested the worst of the slowdown may now have passed, with emerging markets as a whole seeing a modest pick-up in growth to 4 per cent in 2020.

“The first quarter was probably the trough of the slowdown. Growth should be a bit under 4 per cent in the second half, probably picking up a little in 2020,” Mr Jackson said.

Mr Zouk forecast a stronger bounceback next year, to about 4.5 per cent, although this would still be disappointing by historic standards.

He cited continuing headwinds even after cyclical downturns in the likes of Argentina and Turkey reverse, such as evidence of declining foreign direct investment flows into the developing world.

However, Mr Zouk said there were some hopeful signs, such as Brazil moving towards much-needed pension reform and South Africa starting to tackle widespread corruption.

Even the threat of greater trade protectionism in the US and China could yield some benefits, he argued, with emerging countries seeking greater opportunities to trade with each other and develop regional trade blocs in the likes of Latin America and Africa.

Despite the slowdown in growth, Mr Zouk argued the rationale for investing in emerging markets remained intact, particularly in an era of seemingly ever lower interest rates for ever longer in the developed world.

“The capital flows that are going to be generated by ultra loose monetary easing should, for some EMs, be a moment of opportunity,” he argued, as long as the proceeds are put to good use.

Mr Jackson also argued that constructive investment opportunities remained in the developing world, citing some positive developments that often get overlooked, such as improved monetary policy regimes in Brazil and Russia.

“Five or six years ago inflation was a problem and their central banks did not have much credibility, but they have improved significantly. For every Turkey there is a Brazil,” Mr Jackson said.

“It’s certainly a more challenging environment investing in emerging markets but it doesn’t mean to say there are no reasons to do so. There are still positive cases to be made for EMs. They are growing more quickly than developed markets.”

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