Slowdown in India, emerging markets hit global economic recovery: study

Dubai: The economic slowdown in emergingmarkets following the tightening of monetary policies by themlast year has impacted the global export growth and therecovery in advanced economies, a report has said.

According to the QNB Group report, the growth in emergingmarkets (EMs) - from Brazil to Indonesia, Russia and SouthAfrica - is slowing down, partly reflecting the tightening ofdomestic policies by these countries last year to stabiliseforeign exchange rates.

This slowdown is impacting global export demand andaffecting recovery in advanced economies as well, it added.Overall, the slowdown in EMs could jeopardise the globalrecovery, unless advanced economies pick up the pace, thereport added.

Since the US Federal Reserve’s announcement last year totaper its asset-buying programme Quantitative Easing (QE),global capital flew out of emerging economies, forcing theircentral banks to tighten monetary policies to stabiliseexchange rates.

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While the tightening has been relatively successful inreversing the capital outflow in some countries, there hasbeen an impact on the growth of emerging markets.

The last few weeks have seen a series of disappointingdata releases in EMs. Brazil’s Q1 real GDP growth rate slowedto 0.7 per cent (quarter-on-quarter annualised), compared with2.3 per cent for 2013 as a whole. Indonesia’s Q1 growth ratedeclined to 3.5 per cent (5.8 per cent in 2013). South
Africa’s s Q1 GDP contracted 0.6 per cent, compared withgrowth of 1.9 per cent in 2013.

The most dramatic fall was in Thailand with an annualisedQ1 contraction of 8.2 per cent, partly reflecting the currentpolitical instability. Against this trend, India saw a jump inQ1 GDP growth, partly due to a record USD 5 billion spendingon elections, which added an estimated 2 percentage points togrowth in the first quarter.

This generalised slowdown in EMs growth is impactingglobal trade flows. These economies account for approximately40 per cent of all global trade activities and have been amongthe largest contributors to the international export growth inrecent years.

The slowdown in emerging markets is therefore having animpact on global export growth.

According to the World Trade Organisation, the USD valueof global exports grew by a mere 1.7 per cent year-on-year inthe first quarter of 2014, compared with 4.3 per cent in Q42013.

Most of this slowdown can be attributed to lower exportdemand from EMs. In turn, lower global export demand hascontributed to lower Q1 real GDP growth in both the US (-1.0per cent) and the Euro area (0.2 per cent).

So far, the slowdown in emerging economies has not yetresulted in a contraction in global trade as witnessed duringthe Great Recession of 2008-09, the QNB Group Report said.

If advanced economies continue to recover and pick upsome pace, the global economy should be able to maintain itsgrowth momentum, it added.

According to the report, the performance of advancedeconomies critically depends on the normalisation of USmonetary policy and the Fed seems to be set on completing QEtapering in late 2014.

If QE tapering results in weaker US growth, long-term USinterest rates are likely to remain below 3 per cent, thuspushing global capital out in search for higher returns inEMs, it said.

The result could be an uneven global recovery in favourof EMs, just like in the period 2010-13; on the other hand, ifthe US economy recovers as expected, long-term US interestrates are likely to go up, making EMs less attractive, and inturn, this would imply a further EM slowdown, while advancedeconomies recover, it added.

PTI