Emerging markets headed for soft landing

By Vikram Barhat | July 7, 2011 | Last updated on July 7, 2011
2 min read

Economic growth across emerging markets slipped to its lowest rate in two years, according to the HSBC Emerging Markets Index (EMI) for the second quarter.

Decelerating growth, in the face of global economic fragility, the Japanese tsunami and amid the recent impact of strong inflation, suggests that world trade growth may have peaked in the first quarter of 2011.

“After a strong rebound in the immediate aftermath of the global financial crisis, the pace of activity in the emerging markets has faded,” said Stephen King, HSBC’s chief economist. “In many parts of the emerging world, there has been a noticeable reduction in the growth of export orders, consistent with the recent experience of countries in the developed world, suggesting world trade growth peaked in the first quarter of the year.”

But offering a brighter prospect for how the story may play out, the HSBC EMI also suggests that menacing inflationary pressures may finally be submitting to the control of policymakers. Central banks have largely resisted aggressive interest rate hikes for fear of further currency appreciation, opting instead to employ a range of innovative “quantitative tightening” tactics.

The cornucopia of quantitative tightening measures seems to have tamed the significant risk presented to longer-term economic growth by inflation, he added. “This seems particularly true of China, where both output growth and inflation fell markedly during the first half of 2011.”

With the exception of South Africa and Singapore, rates of production growth eased across the majority of manufacturing sectors monitored by the survey. In emerging Asia, China saw growth slow the most in nine quarters, while output rose at the weakest rates for two quarters in Taiwan and South Korea. Even India recorded a slower rise in manufacturing output, although the rate of growth remained substantial, and by far the healthiest of all emerging markets monitored by the survey.

The slowdown in growth, though, is proving to be a useful antidote to excessive inflation and will ultimately prove supportive to further growth.

As the undisputed leaders of global economic growth, emerging markets remain magnets for global capital. By continuing to invest in each other, they are creating prospects of a larger number of Asian-funded infrastructure projects in Latin America and parts of Africa.

Set to create a revolution in the global economy, these projects could ultimately translate into a tenfold increase in intra-emerging market trade during the first half of the 21st Century.

“If a soft landing can be achieved, the stage is set for a sustained period of growth across the emerging world driven by ‘The Southern Silk Road’, an evolving network of ‘South-South’ trade connections established directly between emerging nations.”

This string of emerging nations, he added, holds the key to a full-blown resumption of the recent growth trajectory.

Vikram Barhat