Economic Research Unit
Emerging Markets
Update
December 2016
New year, new
challenges for EMEs
Overview This time last year, worries about the outlook for China’s economy and falling oil and other commodity prices were fuelling
concerns about the prospects for emerging market (and developed) economies. Fears about China have since abated as the economy
continued to grow at a solid pace during 2016, and oil prices have rebounded, helped by OPEC’s decision to cut production effective
from the start of this year. Higher oil prices will bring some relief to oil-dependent EMEs including Russia, where recent survey data point
to a notable improvement in economic activity. However, EMEs are now confronted by a new set of concerns. As the Chief Economist of
the IMF notes in a recent blog, the result of the US election ‘marks a shift… in policy regime’, with the potential effects being felt not just
in the US but also ‘abroad’ and ‘especially strongly in emerging market economies’. A shift to an expansionary fiscal policy would provide
a short-term boost to growth and inflation in the US, resulting in higher interest rates and bond yields and a (further) strengthening of the
dollar. While emerging market economies ‘can benefit from more competitive currencies (against the dollar) and higher US demand’, they
could still feel ‘stress’ given the ‘importance of dollar borrowing by corporates’ in EMEs and the possibility that ‘currency depreciation
might spark higher inflation’. In addition, a potential increase in protectionism also poses a threat to these economies. Overall, EMEs will
continue to face a challenging environment in the year ahead.
Continuing solid growth in China
Dip in economic activity in India
Positive PMI data in Russia
Brazilian inflation easing
Key
Indicators
GDP
CPI
(Y-o-Y % Change)
(Y-o-Y % Change)
Exchange
Rate**
(per $)
China
Q3 6.7
Nov 2.3
6.92
India
Q3 7.3
Nov 3.6
68.02
Russia
Q3 -0.4
Dec 5.4
59.29
Brazil
Q3 -2.9
Nov 7.0
3.20
South Africa
Q3 1.4
Nov 6.6
13.66
Mexico
Q3 2.0
Nov 3.3
21.3
Turkey
Q3 -1.8
Dec 8.6
3.62
Commodities Oil prices have risen further following
OPEC’s decision at end-November to cut output from the start of
2017. Brent has climbed to $57 p/b, its highest level since early
2015. The IEA notes that if OPEC ‘fully sticks’ to its production
target, and non-OPEC producers deliver on their agreement to
also curb output, the market ‘is likely to move into deficit’ in H1
2017. The prospect of demand exceeding supply is supporting
the rise in oil prices.
Commodity
Prices*
Latest**
M-o-M
Y-o-Y
Change
(%)
Change
(%)
Oil ($ per barrel)
57.0
5.6
66.4
Gold ($ per troy ounce)
1178.2
0.7
7.7
Copper ($ per metric tonne)
5580.0
-6.2
13.4
Wheat (€ per tonne)
170.0
4.8
-8.8
1850
0.0
57.0
3.94
2.2
-5.0
Skimmed Milk Powder
(€ per tonne)
Cattle (€ per kg)
* Spot price for Gold; Futures prices for Oil, Copper and Wheat; Skimmed Milk Powder and Cattle are average EU prices
** As of 06/01/2017 for Exchange Rates, Oil, Gold, Copper and Wheat; Skimmed Milk Powder and Cattle are Dec’16 monthly averages
Continuing solid growth in China
Dip in economic activity in India
The solid growth momentum in China’s economy continued into Q4
2016. Industrial output rose by 6.2% y-o-y in October-November,
in line with the rate of growth in Q3, and retail sales increased by
10.4%, also in line with Q3. Both the manufacturing and nonmanufacturing PMI also rose in Q4, to 51.4 and 55.6 respectively.
At the annual ‘central economic work conference’, where senior
Communist Party members outline the national agenda for the
coming year, the leadership set financial and economic ‘stability’ as
its main goal for 2017, pledging to pursue a ‘prudent and neutral’
monetary policy and to contain asset prices. The government has
already taken action in this direction, introducing house purchase
restrictions and imposing higher mortgage down-payments in an
attempt to slow house price inflation. Having weakened against the
dollar in the closing weeks of 2016, the yuan has recovered some
ground at the start of this year.
The Indian government’s decision to withdraw 500 and 1000
denominated banknotes from circulation (‘demonetisation’), aimed
at curbing the ‘black economy’ and stopping counterfeiting, has
disrupted cash availability and negatively impacted economic
activity. The composite PMI fell from a record high of 55.4 in
October to 47.6 in December, well below the expansion-contraction
threshold of 50, ‘as cash flow issues among firms led to restrictions
in purchasing activity and employment’. However, as the Reserve
Bank of India notes in its latest monetary policy statement, ‘if
the impact is transient as expected, growth should rebound
strongly’. The central bank left interest rates unchanged at its
December meeting, despite a further fall in inflation recently. It cited
‘heightened uncertainty’, volatile financial markets in the wake of
the US presidential election, and expected ‘spill-over’ effects from
US monetary tightening as reasons for leaving rates unchanged.
Positive PMI data in Russia
Brazilian inflation easing
Russia’s economic downturn continued to ease in Q3 2016. National
accounts data show that GDP contracted by 0.4% y-o-y, after falling
by 0.6% in Q2, as the decline in consumer spending and investment
slowed significantly and exports expanded. Consumer spending
fell by 3.1% y-o-y, the smallest decline since the recession began
reflecting a gradual recovery in the labour market and a fall in inflation.
A further improvement in the economy looks to have occurred in
Q4. Industrial production increased by 2.7% y-o-y in November,
the strongest increase since late 2014, and the composite PMI rose
to 56.6 in December, its best reading in 50 months. The OECD
expects the economy to expand by 0.8% in 2017, while the latest
Reuters consensus forecast is for growth of 1.2%. The central bank
left interest rates unchanged at 10.0% in December but noted that
inflation risks have diminished ‘somewhat’.
The Brazilian economy contracted by 2.9% y-o-y in Q3, following a
fall in GDP of 3.6% in the second quarter. Consumer spending fell
again on an annual basis though at a slower pace than in Q2, but
there was another sizeable year-on-year decline in investment. For
2016 as a whole, the Brazilian central bank expects the economy to
contract by 3.4%, but is projecting a return to positive albeit modest
growth of 0.8% this year. The unemployment rate has risen further
and stood at 11.9% in November, reflecting a continuing decline in
employment (which has fallen by over 2.5m in the past two years).
Inflation remains elevated though it did ease during the course of
2016, falling to 7.0% in November from almost 11.0% at the start
of the year. The central bank expects inflation to decline to 4.4% in
2017 and 3.6% in 2018, which should provide scope for a further
reduction in interest rates over the coming year.
Mexican central bank intervenes to support peso
The Mexican peso weakened further at the beginning of 2017, posting a new record low against the dollar, as President-elect Trump
threatened US motor companies with a ‘border tax’ on vehicles produced in Mexico and exported to the US. This has prompted the
Mexican central bank to intervene in the foreign exchange market to support the currency, which has helped it to recover some ground.
Contact us at:
[email protected]
Dr. Loretta O’Sullivan
Michael Crowley
Group Chief Economist +353 (0) 766 244 267
Senior Economist
+353 (0) 766 244 268
Andrew Hopkins
Sean Farrell
Economist
+353 (0) 766 248 246
Head of Agriculture
Bank of Ireland Business Banking
+353 (0) 87 627 1044
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