Our central scenario for the rapid-growth markets is that growth accelerates in the second half of the year and into 2013.
Although recession, stalling growth and high unemployment continue to impact many markets, the data and insights in this quarter’s rapid-growth markets forecast tells us that the overall prospects for RGMs remain strong.
Our analysis suggests that RGMs are likely to weather the ongoing Eurozone crisis and remain engines of global growth, though many will see expansion slow this year. Their expansion is expected to accelerate once more in 2013, helping stimulate a wider pick-up.
And as uncertainty surrounding the single currency diminishes — for we still believe a Eurozone break-up is unlikely — we expect growth to move forward from 4.9% in 2012 to 5.9% in 2013 and 6.5% in 2014.
What lies behind such positive projections?
First the rapidly growing Asian countries are playing an increasingly powerful role on the global scene. By adjusting their growth patterns towards more reliance, the major Emerging Asian economies would allow greater exchange rate flexibility.
Meanwhile, the US and other advanced economies should reduce internal demand relative to overall growth. This shift in relative demand and prices between surplus and deficit countries will help stabilizing financial markets and economic systems across the world.
Secondly, we believe that soaring domestic demand in the RGMs is poised to change the rules of the world economy. By 2020, the number of middle-class households in emerging countries will more than double, overtaking the US and Eurozone with nearly 150 million new consumers.
The speed and scale of the transition is astonishing.
For example, in 2011 emerging Asia accounted for just 14% of global consumer spending in US dollars. By 2020, its share will be 25% and by 2030 that share will be 40% - a near threefold rise in just 20 years. In India, meanwhile, 47% of households had income exceeding US$5,000 in 2010; by 2020, 80% will.
Businesses need to urgently adapt their strategies to take advantages of these new challenges and opportunities.
RGMs are likely to take further action to protect themselves against fallout from the Eurozone crisis.
- Rapid-growth markets (RGMs) are well placed to weather the major risks facing the global economy at the present time given that they have space to ease both fiscal and monetary policy. Indeed, cooling inflation has already allowed short-term interest rates to start to come down in around a third of the 25 RGMs, including each of the BRICs.
- Our central scenario for the RGMs is that growth accelerates in the second half of the year and into 2013 as uncertainty surrounding the Eurozone diminishes. Consequently, we expect growth to pick up from 4.9% in 2012 to 5.9% in 2013 and 6.5% in 2014.
- If the Eurozone were to break-up, our analysis shows that the Czech Republic, and Poland would be pushed into recession, with Hong Kong and Malaysia also hit hard due to their dependence on global trade.
- Under our central scenario, we expect growth in 2012 to slow by less in the Asian RGMs than it does in either the Latin American or EMEIA RGMs, as falling inflation allows the Asian RGMs to be more aggressive in using monetary policy to support growth.
- While the slowdown in trade for many RGMs is being cushioned by heavy exposure to other emergers and the US, most countries in Central and Eastern Europe rely overwhelmingly on demand from the Eurozone.
- Poland, Romania, Hungary and the Czech Republic all recorded falls in industrial output in Q1. In the Czech Republic, this produced a sharp decline in GDP given the weakness of domestic demand, which is under pressure from fiscal austerity.
Growing middle classes make RGMs more resilient to shocks than in the past
- Our forecasts for household incomes show that the number of households in emerging markets enjoying higher incomes will grow sharply over the next ten years. The number of emerging markets households enjoying an income of over US$30,000 will more than double to 149m by 2020, overtaking the US (120m) and the Eurozone (116m).
- These households will have discretionary income to spend on leisure pursuits, consumer goods and holidays.
Rebalancing toward services and domestic demand will make high growth more durable
- The major emerging Asian countries that have run surpluses in recent years must adjust their growth patterns toward more reliance on domestic demand and should allow greater exchange rate flexibility. Rebalancing Asian RGMs will not only make the world economy more stable but will also help the Asian countries themselves, making high growth rates more durable.
- By increasing private consumption, investment and infrastructure spending, and realigning price dynamics, large welfare gains can be made across Asia. The services sector will grow strongly in coming years across the RGMs.
Strong rise in FDI flows to emergers in 2011 reflects the long-term attraction of RGMs.
- The current bout of the Eurozone crisis will have a negative impact on FDI into RGMs during 2012, but longer-term FDI will continue to grow as multinational companies are drawn to the high growth rates of the RGMs at a time when growth is stagnant elsewhere in the world.
- As the RGM middle-class grows, the focus of the FDI is likely to shift increasingly from building plants for the production of goods to export back to the developed economies, to serving domestic markets. As the growing RGM middle-class starts to consume more services, the focus will also shift increasingly from the manufacturing sector toward the service sector.
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