Rapid-Growth Markets Forecast: July 2013

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In recent months, investment order indicators in the major economies have been relatively soft and world trade growth has been subdued. While demand in some of the advanced economies has held up reasonably well, domestic demand in some of the key rapid-growth markets (RGMs) has faltered.

Rapid-growth markets continue to prosper, even if their path forward is far from easy.

We now expect a slower recovery in RGMs, with growth of 4.6% in 2013, similar to the expansion in 2012.

The main drivers of strong growth in emerging markets, however, remain intact. Over the medium term, RGMs will grow by close to 6% in 2015–16, much faster than the advanced economies.

Investors reassess risks as recovery in global trade and investment shows signs of faltering

  • Investors have been reassessing the risks in RGMs relative to prospects in the advanced economies.
  • Many RGM currencies have weakened over the past few weeks.
  • Investment order indicators in the major economies have been relatively soft in recent months and world trade growth has been subdued.
  • Low interest rates and strong credit growth are providing less of a boost to domestic demand growth in RGMs, with some concerns over falling returns to new investments and the slowing pace of reform.

Strong medium-term prospects underpin investment flows to RGMs

  • Strong growth prospects and improved risk management have led to increased demand for investment into RGMs over the past decade.
  • Quantitative easing in the US, the UK and Japan has increased liquidity supply. These flows have helped lower interest rates in RGMs and spurred domestic investment.
  • A rising middle class, particularly in Asia, and development of trade flows between RGMs such as Turkey and the Middle East, will help underpin medium-term growth in emerging markets as domestic demand expands.

FDI flows are helping to diversify economies

  • Strong foreign direct investment (FDI) flows, easier access to credit, and the growth of entrepreneurship is fueling the development of new businesses and sectors within RGMs and helping to diversify economies.
  • The increasing use of mobile phones presents new business opportunities, allowing people even in remote locations to manage their finances electronically. In addition, the growth of private credit is enabling new businesses to expand.

Risks of a productivity slump in some RGMs could have global repercussions

  • Managing the transition toward higher consumption, and a greater role for the financial and other service sectors in China, will not be easy. If China fails to reach its potential, growth could slow much more sharply.
  • A weaker China has significant implications for other countries in Asia and worldwide — including countries sensitive to commodity prices that Chinese demand has supported. In Brazil and India, the pace of structural reform could slow.