IMF Trims Emerging Nations’ Growth Outlook
April 9, 2014
The IMF trimmed its growth expectations for emerging markets as part of its global economic outlook released Tuesday.
Emerging market economies should expand by 4.9% this year, which is 0.2% lower than the IMF previously forecast. Emerging market economies rose 4.7% in 2013, and contributed more than two-thirds of global growth.
The MSCI Emerging Markets ETF (EEM) gained 1.75 in midday trading, while the Vanguard FTSE Emerging Markets ETF (VWO) rose 1.5%. The iShares MSCI Turkey ETF (TUR) rose 3% and the Market Vectors Russia ETF (RSX) was up 1.5%.
IMF chief economist Olivier Blanchard said the overall global recovery “is becoming stronger but also broader.” Still, he said the recovery is uneven and pointed to risks in emerging markets as the world’s finance ministers and central bankers prepare to meet in Washington this week.
As the Wall Street Journal reports, the IMF:
- kept its growth forecast for China at 7.5% for the year, down from 7.7% in 2013. But, the IMF warned China’s economy could slow more than expected as authorities tackle the country’s borrowing problems.
- downgraded Brazil’s 2014 forecast to 1.8%, down 0.5% from previous projections. Brazil’s government is battling to keep inflation in check.
- cut Russia’s growth forecast to 1.3% from 1.9%. Russia’s land grab in Ukraine has resulted in economic sanctions.
Blanchard said the U.S. recovery is strongest among advanced economies, with growth of 2.8% “pulling the world.” But deflation is a risk in Europe, especially as Spain, Portugal and Italy recover. Greece — now categorized as emerging — is expected to sell about €2 billion ($2.7 billion) in five-year debt Wednesday, its first long-term bond issuance since its international bailout, WSJ reports.
Of emerging markets, Blanchard said more exports to healthy developed markets is positive. But as the Federal Reserve pares economic stimulus and interest rates increase, emerging markets’ costs will rise, growth could falter, and investors exit at the first signs of risk. As foreign money flees Russia, Turkey and other emerging nations, currencies falter and central banks must raise interest rates. (Nominal exchange rates have fallen by more than 10% in Turkey, India and Russia between late May 2013 and March 31, see IMF chart.)
In its lengthy report, the IMF warns that because emerging market economies are more intertwined with developed market economies, a more significant, synchronized decline among them could hurt developed markets more than expected. The report, beginning on page 72, concludes:
“A negative growth shock to emerging market economies, akin to those experienced in the mid-to-late 1990s but not necessarily crisis driven, would have moderate effects on all advanced economies, with Japan affected the most. Trade has been the most prominent spillover channel. There is evidence to suggest, however, that the financial channel could play a bigger role in future transmission of growth shocks in emerging markets … The median exposure of advanced economies to emerging market economies, measured as gross external asset holdings, reached 8.7 percent of GDP in 2012—an increase of almost 3.5 percentage points of GDP from the median value in 1997. Although financial exposure remains concentrated in bank claims, exposure through portfolio investment has increased, particularly in equity investment.”
Content provided by: Shuli Ren, CFA - Barron’s / Emerging Markets Columnist and Blogger / Twitter: @shuli_ren