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Global Outlook

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Emerging Markets Outlook − The tail wagging the dog

Fri, Sep 25 2009, 07:19 GMT
by Flemming J. Nielsen

Danske Bank A/S

• Emerging markets have started recovering despite continued weakness in the more developed markets. Emerging markets in Asia (EM Asia) are leading the recovery, while signs of stabilisation so far have been only tentative for most countries in central and eastern Europe (CEE). The recovery has been driven by easier international financial conditions, strong policy response particularly in Asia, and a sharp decline in inflation.
• Growth in Asia is expected to slow but overall remain healthy as policy focus shifts from maximising growth to securing sustainability. China, India and South Korea are expected to start tightening monetary policy in Q1 10. CEE is likely to lag global recovery and monetary policy overall remains on hold until H2 10. Fiscal deficits remain a concern for CEE.
• Comparatively small output gaps, robust domestic demand, inflation picking up and EM Asia leading the monetary tightening cycle, make a strong case for the appreciation of Asian currencies. China is expected to resume its gradual appreciation policy at some stage next year.

Outlook for emerging markets has improved

Emerging markets were hit particularly hard by the global financial crisis in Q4 08 and Q1 09. However, despite continued weakness in most developed markets, some emerging markets started recovering substantially in Q2 09. This has particularly been the case in Asia, where growth surged across the region, albeit from depressed levels. China has developed largely in line with our expectations in Global Scenarios (June 2009), while recovery in Asia outside China has come faster and stronger than expected. The recovery in Asia has been an important boost to global industrial activity and a driver behind the recent increase in commodity prices.

So far there are only tentative signs of stabilisation in CEE and CIS with Poland as the main exception. Although the CEE and CIS economies are expected to improve in the coming months, we continue to believe the recoveries will be mainly export driven and lag global recovery. However, we now see less downside risk on CEE and CIS economies, as the global economy appears to be recovering and external financial conditions have eased significantly.

Commodity producing countries in Latin America and the Middle East will be unable to be an independent driver for a global recovery, but are currently benefitting from higher commodity prices on the back of the global manufacturing recovery.

• Download full Euroland Outlook with charts

Published on  Fri, Sep 25 2009, 07:24 GMT