Rapid-growth markets will continue to contribute nearly half of the world’s growth over the next three years
- Rapid-growth markets (RGMs) are expected to grow collectively by 5.3% this year
- Demand in metal from China and other Asia-Pacific economies push prices high
- Emerging Asia with rising middle class will lead the growth for all RGMs
- Rising trade links will continue to support foreign direct investment (FDI) from Asia and Latin America to Africa and other RGMs
- Emerging Asia with average growth of over 6% p.a. over the next decade
Hong Kong, 1 February 2012 — Rapid growth markets (RGMs) are expected to grow collectively by 5.3% this year, in stark contrast to the mild recession expected in the Eurozone in H1 2012 and modest growth in the US, according to Ernst & Young’s quarterly Rapid-Growth Markets Forecast (RGMF) released today. While RGMs will remain a major destination for investors, in the near term, they are showing the strains from the falloff in demand from the Eurozone, as well as the buffeting to financial markets and business confidence over the past few months. As a result, growth in 2012 is expected to be lower than forecast by October 2011’s RGMF. However, these markets will continue to contribute nearly half of the world’s growth over the next three years.
Rain Newton-Smith, Senior Economic Adviser to Ernst & Young’s Rapid Growth Markets Forecast explains, “Any escalation of the Eurozone debt crisis would have serious short-term consequences for the rapid-growth economies. But RGMs are much more resilient than in previous decades. Government debt is low across most of these economies and improved macro management means these economies are in a much better position to use well-targeted government spending or monetary policy to offset weaker growth.”
Gerard Dalbosco, Managing Partner, Markets, Asia Pacific at Ernst & Young comments, “The RGMs will continue to contribute nearly half of the world’s growth over the next few years. Emerging Asia with its rising middle class will lead the way, while strong commodity prices will underpin prospects in Africa and the Middle East.”
FDI inflows major contributor to growth
FDI inflows have been an important driver of growth in RGM countries over the past few years. With RGMs set to grow much faster than the developed world in the coming years, rising economic and trade links within RGM countries will see a continued flow of FDI from Asia and Latin America to Africa and other RGMs, improving infrastructure and technology across these markets.
However, the BRIC economies remain some of the most important destinations with FDI inflows to China and Brazil, in the first six months of 2011, at US$111b and US$32b respectively also proving that FDI inflows have held up remarkably well despite turmoil in financial markets.
China and India are seeking to lock-up steady supplies of key commodities through major investments in RGMs in land and infrastructure. China is also putting money into oil and mineral production. FDI is flowing into Africa from other sources, including Brazil and Malaysia. The ease of doing business is being facilitated in many countries by the growth of telecoms and IT sectors.
“With prospects in the advanced economies weakening, particularly in the euro area, RGMs will need to look for opportunities within their own economies to drive growth, including fostering entrepreneurship.” Dalbosco comments, “According to Ernst & Young’s survey of over 1,000 entrepreneurs in G20 countries, 61% of respondents in RGMs perceive that simplifying start-up regulations would have a high impact on entrepreneurs’ long-term growth prospects.”
Outlook bullish in medium-term for RGMs
“A growing labor force, a catch-up in productivity and improved fundamentals will continue to drive strong growth in RGMs.” explains Dalbosco. ”Emerging markets in Asia will lead the way, with average growth expected to be over 6% p.a. over the next decade.”
Sub-Saharan Africa will not be far behind, with a young population and FDI inflows contributing to growth close to 4.5% p.a. over the next 10 years. This period of growth is almost unprecedented for Africa, which, in the past, has been beset by political instability, commodity price volatility and low levels of investment.
The more subdued outlook for oil and commodity prices will lower the growth potential in Latin America, but the forecast predicts that there should be strong infrastructure investment and education contributing to higher growth prospects. Oil exporters look toward more government resources to increase spending and their closer links with faster-growing Asian economies rather than Europe.
Threats to growth in RGMs
The slowing in growth across the RGMs reflects several factors including the Eurozone crisis which will remain the most damaging until it is resolved. The business impact of an escalation of the crisis would be particularly serious for RGM exporters who are exposed to significantly weaker demand from Europe.
RGMF also observed a reversal in portfolio flows since July 2011 as investors became increasingly risk averse. Threats to liquidity and lending by European banks with a wide global reach are particularly disquieting for RGMs. Banks are selling assets and cutting back on loans under pressure to strengthen their capital which is weakening financial flows into and within RGMs with potentially depressive impacts not only on business operations but also business investment.
Dalbosco comments, “While growth prospects in the short-term have been dented by the turmoil in global markets, and could be further affected by the events in the euro area, growth in RGMs is set to rise about 6.5% in 2013-14, a pace of expansion that will be significantly higher than in advanced economies.”
Growth in Asia’s giants is slowing
Large domestic markets in China, India and Indonesia provide a cushion against the events in the rest of the world. Retail sales volumes in Asia have remained reasonably strong with volume growth only slowing marginally over the course of 2011 in China, Malaysia and Korea.
“The level of growth in Q3, 2011 and the latest domestic and external developments indicate a further slowdown in growth over the coming few quarters is inevitable” says Dalbosco. A very robust export performance was a key driver of overall growth in Q3, 11 but this is likely to fade given the market deterioration in the global economy in recent months. Meanwhile investment has performed poorly in 2011 and is unlikely to rebound in the short term.
China’s initial resilience to the recent deterioration in Europe appears to be waning. Both the manufacturing and services Purchasing Managers' Indexes (PMI) dropped in November 2011 to the lowest level since February 2009. However, the manufacturing PMI improved somewhat in December to 50.3, and both export and domestic new orders picked up from the low levels in November. This suggests that the manufacturing sector may begin to recover although investment remains subdued. Indeed, fixed asset investment, which has been a significant driver of growth over 2011, fell on the month in November.
“Inflation remains stubbornly high at 9.1% in November, 2011 limiting the ability of policy to respond to the weakening in growth prospects. As a result, we have lowered our GDP growth forecast for 2012 to 6.8% from 8.0% previously.”
Given the importance of land values and the construction sector to GDP growth and to local government revenues, a downturn in the property market could lead to a significant slowing in China’s growth. But with over US$3.2trn in reserves, China has plenty of resources to counteract any slowing in growth. Indeed, we have already seen a shift in China’s policy stance with a lowering in the reserve requirement by 50bp.
Thailand was devastated by severe flooding in October and early November, resulting in factory closures and disruption to global supply chains, particularly in the automobile and electronics industries. Manufacturing output in Thailand fell by 35% on the month in October, and more than 20% of the world’s output of hard disk drives comes from Thai factories that have been closed due to the flooding. Some of the weakness in exports in Asia may be related to supply chain disruption but evidence from the most recent PMIs suggests that there is also a slowing in domestic orders in the region.
Forecasts for rapidly growing countries in Asia-Pacific
Mainland China/ Hong Kong special administrative region (SAR). Less concern of overheating economy
Annual growth was 9.1% in Q3 2011, only a little lower than 9.5% in Q2. The momentum of domestic demand should keep growth in Mainland China reasonably strong but growth is expected to slow over the coming quarters as the faltering world economy dampens exports and manufacturing. Growth of 8.1% in 2012 is expected and to strengthen to just over 9% in 2013. A slump in exports coupled with a sharp slowdown in the construction sector could have a considerable impact on growth, but expect to see a significant shift in monetary and fiscal policy if growth were to slow significantly.
In Hong Kong special administrative region (SAR), both commercial and residential property price inflation started to ease in Q3 2011 and retail sales growth moderated significantly in September, with weaker outlook in financial markets weighing on Hong Kong’s prospects.
India. High interest rates set to squeeze both inflation and growth
The Reserve Bank of India (RBI) raised its repo rate by 25bp to 8.5% in October. This took its cumulative tightening since March 2010 to 375bp despite a run of weak business confidence surveys, falling car sales and signs of moderating GDP growth. The RBI justified its decision on the continuing threat posed by wholesale price index (WPI) inflation remaining stubbornly high — following the depreciation of the rupee since late July, the local crude oil price is still close to its 2011 high — and the risk that inflation expectations could rise further.
Substantial upside risks to both food and fuel prices could blunt the fall in headline inflation, which contributed to continued downward pressure on the rupee, forcing the RBI to keep policy tighter for longer. Even if this risk can be avoided, GDP growth of only 6.8% in 2012 is expected, below trend for a second year and lower than 7% for the first time since 2002. Provided inflation and interest rates start to fall in 2012, and the world economy begins to recover, spurring investment, GDP growth should accelerate strongly in 2013.
Indonesia. Growth very robust, although bank has begun monetary loosening
The central bank followed up October’s 25bp interest rate cut with a further 50bp cut in November, taking rates to a record low of 6.0%. With domestic demand likely to stay strong through the global downturn and the economy growing by a robust 6.5% in the first three quarters of this year, the bank is expected to leave rates unchanged now in H1 2012.
The economy expanded by 6.5% on the year in Q3, underpinned by strong exports. Domestic demand maintained firm momentum with consumer confidence at a seven-year high and the labor market improving. The economy is expected to expand by 6.2% in 2012. The authorities have fiscal and monetary scope for stimulus if necessary, particularly with the easing in inflationary pressures. Strong growth of more than 6% is expected in the medium term.
Korea. Industry hit by global turmoil but modest GDP growth to continue
Quarterly GDP growth was a little stronger in Q3 than anticipated. Slowing export growth suggests that the global problems will eventually have a significant impact, although relatively resilient Chinese growth should offer some support. GDP is expected to increase just 0.2% in Q4, resulting in growth of 3.5% in 2011 as a whole. The quarterly pace of expansion should pick up during 2012, particularly in H2 as the global background starts to improve. Provided growth is broadly in line with these estimates, the central bank is expected to keep its base rate at 3.25% until Q3 2012. But if activity falters more significantly, both monetary and fiscal policy could be eased.
Malaysia. Domestic demand remains robust but risks are to the downside
The economy maintained solid momentum in Q3 2011 with growth picking up ahead of expectations to 5.8% on the year after 4.0% in Q1. The manufacturing sector was held back in Q2 by supply disruptions caused by the disaster in Japan, and the strong manufacturing rebound underpinned Q3 growth. Domestic demand stayed robust with both fixed investment and consumption growing by more than 6% on the year, while export volumes were also firm, boosted by strong sales of commodities. Domestic demand should underpin growth but weaker external demand is likely to impact growth in 2011. But, thereafter, growth should rise closer to trend in 2012-14. We expect the bank to leave rates on hold until Q2 2012. Inflation remains high at 3.4% in October but has stabilized in recent months.
Thailand. GDP likely to fall sharply in Q4; floods have devastated manufacturing
Severe floods have swept through Thailand in recent months, closing seven of the country’s largest industrial estates. In flooded areas, activity has ground to a halt and this has drastically altered expectations of GDP for 2011. These same worries kept seasonally adjusted consumer spending flat on the quarter in Q2 and Q3. With cost estimates of the damage increasing week by week and the disruption far from over, a larger sum is likely to be needed. By the middle of 2012, recovery is expected to be well under way. Prospects are good, with growth expected to average 4.8% in the medium term.
Vietnam. Although inflation is subsiding, growth is set to stay below target
The authorities will concentrate policy on boosting growth as inflation slows. But, after rising by about 5.4% in 2011, GDP growth may stay below the 6% to 6.5% target in 2012 as the Government faces a potentially hazardous restructuring of state enterprises and shakeout of smaller banks, and tries to remobilize the substantial domestic savings, which were stored in gold and hard currency while inflation was out of control. The risks of further VND devaluation will limit the loosening of monetary policy in H1 2012; and higher investment also depends on a politically difficult redirection of credit away from the public sector, and reform of state enterprises. 2012 will be another year of above-target inflation and below-trend growth. The outlook for faster growth will improve in 2013, when inflation will be back below 10% and export growth will be narrowing the current account deficit substantially.
Long-term prospects brighter
Although the picture for the near-term for the RGMs is bleaker than expected, the longer-term view is much more positive. Many RGMs will have to try to exploit their own economic resources, if they wish to continue to enjoy growth at the pace of recent years.
Dalbosco concludes, “The long term outlook for RGMs is bright and at is not possible to look at them from a business perspective without feeling a sense of opportunity and excitement. Most of these economies are more resilient than their developed counterparts which adds to their attractions to major global businesses.”
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About the Rapid Growth Markets Forecast
The quarterly Ernst & Young Rapid-Growth Markets Forecast is a macroeconomic forecast co-produced with Oxford Economics. It aims to fulfill the need for practical and accessible economic forecasts and insights on the development of 25 rapid-growth countries around the world. These countries have been selected on three key criteria: they should be large, both in terms of GDP and demographics; they should be dynamic, rapidly growing countries; and should be of strategic importance for business development. Our forecast is based on Oxford Economics’ Global Econometric Model and provides both analysis of the implications for corporations doing business in rapid-growth markets and recommendations for decision-makers. Follow the development by tuning in to our quarterly webcast debate and by visiting www.ey.com/rapidgrowth