GLOBAL ECONOMY WEEK AHEAD-Light dims for emerging …
* Investment banks cut emerging market GDP forecasts
* Room for EM fiscal, monetary stimulus less than 2009
* Global economy cannot expect big boost from EMs
* EU leaders’ summit to deliver no quick fix
WASHINGTON, June 24 (Reuters) – Commodity prices can be a
good barometer for emerging market growth, and their relentless
sell-off over the past two months has tracked the fading of the
one bright light in the global economic recovery.
Brazil and India are slowing sharply, China has ratcheted
down a notch as global trade slows, and the almost 30 percent
decline in the price of oil has hit Russia’s economy. These all
make for troublesome developments when Europe is teetering on
the edge of recession and U.S. business is retrenching.
“This is part of the long period of healing in the global
economy,” said Pablo Goldberg, head of emerging markets research
at HSBC.
Emerging and developing economies had roared out of the
2007-2009 global financial crisis to post 7.5 percent and 6.2
percent GDP growth in 2010 and 2011. They were lifted by
generous stimulus programs and their solid government, bank and
household balance sheets.
The stellar performance helped drive commodity prices to
heady levels. The Thomson Reuters/Jeffries Commodity Research
Bureau Index hit a record level above 471 in mid-2008 on
strong demand from emerging economies before retreating. It
rallied again from late 2009 until mid-2011.
But as China showed signs of slowing, it has slumped, and
since March this year, the index has lost 18 percent.
The hope had been that buoyancy in emerging markets would
allow the global economy to ride out its long and painful
healing as U.S. households paid down debt and banks cleaned up
their balance sheets.
Then Europe’s government debt problems intervened,
protracting the slow recovery. European Union leaders meet next
weekend, but they have warned not to expect any quick fix to the
2-1/2 year old debt crisis. The most they expect to deliver at
their summit is an agreement to move forward on a banking union,
while pushing off fiscal and political union to a later date.
This gradualist approach will keep the euro zone in a
perilous state for many months or even years ahead, with Spain
and Italy vulnerable to market pressures, hurting growth.
Now the drivers for emerging market growth are fading too.
Export demand from Europe, and to a lesser extent the United
States, is slumping. Despite growing domestic consumer markets,
emerging economies remain heavily export dependent.
A round of central bank tightening last year to counter
inflationary pressures is starting to bite. China in 2010 and
2011 tightened interest rates by 1.25 percentage points and
Brazil and India by 3.75 percentage points.
In addition, financial market volatility driven by the euro
crisis is scaring investors away from riskier assets. At the
same time, major Western banks are withdrawing from emerging
markets as they restructure and rebuild their capital base.
All of this is sucking investment from emerging markets.
The Institute of International Finance estimates that
international banks have withdrawn $190 billion in financing
from Latin America and Eastern Europe since the second half of
2011.
“That undermines their capacity to finance investment
projects, which in turn exacerbates the negative impact on
emerging markets’ fixed investments stemming from both higher
uncertainty and weaker future demand from advanced economies,”
said Martin Schwerdtfeger, a senior economist at TD Economics.
Investment banks have started to lower their emerging market
growth forecasts. Barclay’s Capital shaved 0.2 percentage point
from this year’s GDP outlook, to 5.6 percent, and by half that
amount from its 2013 forecast, to 6.2 percent.
Credit Suisse is more pessimistic. It cut its GDP forecast
by 0.4 percentage point in both 2012 and 2013, to 5.1 percent
and 5.6 percent respectively, and warned that worse could come
if Europe’s problems deepen.
World leaders at their G20 summit in Los Cabos, Mexico, last
week noted that “clearly the global economy remains vulnerable.”
If economic conditions further deteriorate significantly,
countries with sound budgets stand ready to implement additional
budgetary stimulus measures, they said.
But this time around, emerging economies have less room to
maneuver. In 2008, their budgets on average were in balance.
Four years later, they have a 2 percent deficit, Credit Suisse
estimates. On the monetary front, policy rates on average were 7
percent in 2008 and today are several points lower.
In other words, for a variety of domestic policy reasons,
any new round of macroeconomic stimulus would likely be less
forceful than the one that engineered the strong rebound in 2009
and 2010. So Credit Suisse warns not to expect emerging
economies to rescue global growth for a second time.
“We may not be at the brink of a new global recession, but
we are even less likely to be at the threshold of a global
boom,” it said.
Article source: http://www.reuters.com/article/2012/06/24/economy-global-weekahead-idUSL2E8HMF6920120624
Posted by braziltribune
on Jun 24 2012 Filed under Market.
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