Rapid-Growth Markets Forecast: October 2013

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GDP growth in the second quarter of the year is showing a declining trend across our rapid-growth markets (RGMs), with the notable exception of China. What is causing this shift in events?

Brighter growth prospects for developed economies have dimmed those of many rapid-growth markets.

Uncertainty in global financial markets has heightened, leading to a marked fall in many RGM currencies, sharp rises in bond yields and underperformance in equities.

In response to these external pressures, a number of RGMs have been forced to tighten monetary policy.

The rising costs will translate into lower investment and consumption, all of which weigh on their immediate growth prospects. We now expect growth next year in RGMs to be 4.7%. This is considerably weaker than the 5.7% forecast in our July edition. The move is driven by downward revisions to Latin America, Russia and Asia.

Weak growth and sharp currency falls add to the challenges

  • With the notable exception of China, GDP growth in Q2 2013 and the outlook in Q3 has disappointed across most of the RGMs.
  • Instability across financial markets has added to the challenges RGMs face. A flight from risk has driven sharp falls in RGM currencies, steep rises in bond yields and an underperformance of equities. The political dispute over the US government shut-down and debt ceiling has increased uncertainty in financial markets — and about growth prospects in the US and beyond.

High inflation and borrowing costs to weigh on investment and consumption

  • Many emerging markets, such as Brazil, India, Indonesia and Turkey, have been forced to tighten monetary policy as a result of external pressures.
  • The rises in bond yields and policy rates have led to much higher borrowing costs for governments, businesses and households. These higher costs will translate into lower investment and consumption.

Many RGMs still vulnerable to external pressures

  • We are likely to see further financial market volatility over the coming months. Our heatmap of risk shows that a number of RGMs remain vulnerable to pressures from capital outflows.
  • Turkey, Argentina, Egypt and India all score high on our risk index. Risk in these countries is driven by relatively high current account deficits, high levels of government debt and inflation.

Tackling medium-term challenges requires political consensus for reform

  • Many responses to the financial market volatility have been too focused on trying to slow the currency falls. Not enough emphasis has been put on policies to boost medium-term growth.
  • We will see more divergence in growth prospects between those RGMs that are willing and able to implement economic reforms to facilitate growth, and those with weaker institutions.
  • Despite the near-term challenges, manufacturing and utilities — which represents nearly a third of output in RGMs — is expected to grow by more than 6% in 2015–17.
  • As the numbers of middle-class households expand rapidly in RGMs, demand for financial and business services will also grow strongly in coming years, rising almost 6% by 2017.