All the concerns about the health of emerging markets has the folks at Capital Economics scratching their heads: Economic growth has been slowing for years, suggesting that the slowdown, which has sapped share prices, might almost be over rather than just beginning.
According to Neil Shearing, chief emerging markets economist at Capital Economics, economic growth in emerging markets peaked in 2010 and has been slowing pretty much ever since. His proprietary “GDP Tracker” points to annual growth of just 4 per cent now, down from 9 per cent in the second quarter of 2010.
“Talk of a ‘Great Deceleration’ is arguably three years too late,” he said in a note.
Part of the reason for the slowdown has to do with the fact that several one-off factors that boosted growth initially have now faded. For example, widespread tariff reduction and integration into the global trading system were great during the past decade but the benefits have largely played out already.
The other problem is that the big engines of growth – the so-called BRICS: Brazil, Russia, India and China – are slowing, dragging down emerging markets growth and global growth. These countries are slowing for structural reasons, Mr. Shearing argues.
“Accordingly, economic reform rather than policy stimulus holds the key to restoring growth,” he said. “And with vested interests likely to frustrate reform, we don’t expect a sharp rebound.”
So is it time to shelve your enthusiasm for emerging market stocks?
Mr. Shearing believes that the bulk of the slowdown has already occurred. In the case of China, he suspects the adjustment from double-digit rates of growth to something closer to 6 or 7 per cent has taken place – and slowdowns in Brazil, Russia and India are done.
“Tail risks persist – particularly in Brazil and China, where a rapid expansion of credit poses a threat to financial stability,” he said. “But our central forecast is that the BRICs contribution to EM growth will level off over the coming years rather than fall further.”
And even if the BRICs remain weak, there should be opportunities elsewhere. He points to South East Asia, where markets should benefit from China’s transition to a consumer-driven economy. And Mexico should benefit from the U.S. economic recovery.