Consumption a panacea to weak world outlook in rapid-growth markets
Mumbai, 7 April 2012 – While the global economy is still in an uncertain state and trade flows remain subdued, rapid-growth markets (RGMs) around the world are proving resilient. RGMs are expected to grow collectively at 5.3% this year, bouncing back to 6.3 % in 2013, according to Ernst & Young’s quarterly Rapid Growth Markets Forecast (RGMF) released today.
Despite the decline in financial wealth in H2 2011 in many markets, demographic trends and rising real incomes over the medium term are set to underpin strong consumption.
As per the forecast, an unexpected, strong pickup in activity towards the end of last year and beginning of this year in some RGMs means they will contribute over one-half of global growth over the next three years.
Rain Newton-Smith, Senior Economic Adviser to Ernst & Young’s Rapid Growth Markets Forecast explains, “RGMs are proving resilient in the face of the twin impacts of the Eurozone recession and continued tensions in the Middle East. Although not all RGMs are enjoying equally solid growth prospects, they are still offering good opportunities to companies and investors across a wide range of sectors.”
India is expected to grow at 6.1% in calendar year (CY) 2012, similar to the pace recorded in Q4 2011. Growth should be picking up in H2 2012, provided the global economy does not experience a further shock. Over the medium term, we expect a strong recovery in investment which will help lift overall GDP growth over 9% by 2014. Growth
Says Farokh Balsara, Partner & India Markets Leader, Ernst & Young India “India’s domestic demand-driven growth model is acting as a catalyst for attracting foreign investments into the country. Although the ongoing global uncertainty may have prompted global investors to become more cautious, India’s inherent advantages and proven resilience to counter-act macroeconomic challenges generally outweighs these concerns”
According to the forecast, in India, the biggest development will be in the lower middle class with the number of households with disposable income of USD 5,000 to USD 15,000 rising to around 150 million in 2020 from just under 100 million now. In particular, this represents opportunities for companies in the developed economy such as US and Europe for investments.
While the purchasing managers Index (PMI) and car sales data in January and February of 2012 have hinted at a stronger growth dynamic for India, the country will need to address rising inflation, which is still high. As per the forecast, the country’s central bank will not be in a position to cut interest rates until core inflation ( excluding food) is on a clear downtrend, and that may still be some months off- particularly as the economy actually has gained considerable momentum recently. The forecast adds, wholesale price inflation should trend down through 2012 to about 5% in Q4, reflecting the lagged impact of the weaker economy and lower food prices.
Rise in trade partnerships among RGM countries
Trade between RGMs will see the fastest growth over the next decade as a result of changes in both the costs of production and the demand for goods says th forecast. Flows in goods from China to India are expected to grow by an impressive 22% per year over the next decade. Exports from Africa and the Middle-East to China and India are set to grow by more than 12% per year over the next decade.
Eurozone weakness will weigh on RGM growth
The continued uncertainty in the Eurozone not only affected European RGMs but also those with trade and financial links to the region. For example, the weaker outlook is affecting African RGMs such as South Africa, Egypt and Ghana where a third of exports are destined for the Eurozone. Increased volatility in financial markets from a renewed escalation of the crisis in the Eurozone will have a significant impact on growth in countries as diverse as South Africa, Hong Kong and Chile where capital markets are an important driver of growth.
The combination of the recession and new rules on capital requirements has led to the major European banks behaving much more cautiously, including the reduction of external funding of their substantial operations in emerging Europe. This could further squeeze credit supply in the region – already under pressure from the deterioration in economic prospects.
Volatility of oil and commodity prices to impact RGMs
Prices are likely to remain volatile in 2012. Heightened geopolitical tensions raise continued supply concerns, while the ongoing Eurozone debt crisis weighs on oil demand prospects. The tightness of supply will also make the market more vulnerable to further surprises, making spikes in oil prices likely.
This has implications for RGMs, particularly the large oil importers such as India and China. Other RGMs, such as Nigeria, Ghana, Saudi Arabia and Qatar, will see a boost to their growth prospects through higher oil prices improving export revenues and their fiscal balances.
RGMF expects oil prices to average USD112 per barrel in 2012, with the price falling from its current highs toward USD105 by the end of the year assuming geopolitical tensions subside; supply from the Organization of the Petroleum Exporting Countries (OPEC) increases; and, global demand remains subdued in the near term. Over the course of 2013, oil prices will start to rise again in nominal terms reaching an average of US$135 per barrel in 2020.
About Ernst & Young
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.
Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.
This news release has been issued by EYGM Limited, a member of the global Ernst & Young organization that also does not provide any services to clients.
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.