With the gentle accumulation of downside risks, analysts at Nomura explained that perhaps the largest downside risk to the world economy comes from China and other EMs, which collectively contributed the lion’s share to global growth in 2017 (56% based on GDP at market exchange rates or 74% based on purchasing power parity).
"China’s economy is under considerable strain from deleveraging, and we expect growth to take another leg down in Q1 2019, as lower-tier city property markets correct and payback from the front-loading of exports kicks in.
We are also not optimistic for a quick end to US-Sino trade frictions and continue to believe that the countries in EM – particularly Asia – are more exposed than their counterparts in DM, because of their very open economies that are highly integrated into supply chains with China.
Across many EM economies, financial conditions have tightened and will likely continue to do so, as the Fed continues hiking rates and as aggregate QE of the G4 central banks switches to QT, keeping investors focussed on repricing risk in EM instead of hunting for yield. Overall, we expect the next wave of EM turmoil to be centred in Asia and involve weakening growth, falling property prices, widening credit spreads and tightening market liquidity.
Drilling down, there are (positive and negative) idiosyncratic factors affecting individual EM economies (see country pages for details). Based on politics and policies we have turned more positive on Brazil, but a little more negative on Mexico.
We see geopolitical risks rising again in Russia. South Africa is set to exit its recession, and we see a palpable risk that Turkey’s economy starts contracting. In Central Europe, we judge more central banks are gearing up to normalise monetary policy. In Asia, as discussed, we believe the worst is yet to come in China, and see downside risks to (slowing) growth in India and a high likelihood of fiscal slippage in Malaysia. By contrast, we expect growth to hold up in Indonesia and the Philippines and macro policies to remain prudent."
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