"Emerging Market Slowdown Adds to Global Economy Pains"
This was how the International Monetary Fund (IMF) headed the latest update to its World Economic Outlook (WEO) report.
It contained three dot points:
• IMF projects global growth in 2013 unchanged from 2012 at just over 3%
• Weakness in emerging market economies will dampen global growth prospects
• Risks to growth remain low in advanced economies but are more worrying in emerging markets
Yes Virgie, there's a reversal going on - advancing economies are advancing while emerging ones are...errr...sinking. Yet somehow I suspect that financial markets have all been clued up on this since 2012 became 2013. And sure enough, there it was...as plain as the virgin snow!
After running neck and neck through all of last year, the MSCI Emerging Market Index started to underperform the developed markets' benchmark - the MSCI World Index - starting at the turn of the year. This is one of the many times when I wish our news system is able to show a chart of the two together for it clearly shows the divergence - starting in January 2013 -- much more than any word I can conjure can. (hey Mr. IT guy, any luck on this?)
The equity index for emerging markets and developed markets didn't stray far from each other at the end of last year - plus 13.9% versus plus 13.1%. But since January this year, they've parted ways with developed market equities continuing on their upward path while emerging ones steadily sliding down the slippery slope to goodness knows where.
So much so that this year to date, developed markets are up 12.8% while emerging markets are down 8.9%.
And should the IMF gets its revised prediction spot on there'll be more blood on the boards of emerging markets. "The Fund" has shaved 0.3% off its 2013 and 2014 growth forecast for them to 5.0% and 5.4%, respectively (from the already downgraded April 2013 projection of 5.3% and 5.7%). This is higher than the 4.9% growth recorded in 2012 - but only just.
According to the IMF, "continuing growth disappointments in major emerging market economies" reflected "to varying degrees, infrastructure bottlenecks and other capacity constraints, slower external demand growth, lower commodity prices, financial stability concerns, and, in some cases, weaker policy support".
It adds that there is "the possibility of a longer growth slowdown in emerging market economies, especially given risks of lower potential growth, slowing credit, and possibly tighter financial conditions if the anticipated unwinding of monetary policy stimulus in the United States leads to sustained capital flow reversals".
Now how does this fit in with the Fed's taper soon story - a notion that financial markets (at least the developed country ones) appeared to have surrendered to over the past few weeks -- particularly with the IMF also lowering its US forecast by 0.2% each in both 2013 and 2014 to 1.7% and 2.7%, respectively?
By the by, this is consistent with the Obama government's own forecast recalibration of US economic growth to 2.0% (from 2.3%) this year and 3.1% (from 3.2%) next year.
As the IMF put it, "Downside risks to global growth prospects still dominate: while old risks remain, new risks have emerged" and that is, in emerging markets.
Does the benefit of taper - normalisation of monetary policy and Fed balance sheet - still outweigh the cost - confidence sapping financial market volatility and perhaps, a recession in emerging markets?
In this highly inter-connected world, what goes around comes around...to bite you back on your backside.
We've had a re-run of the Great Depression, so many re-runs of the European sovereign debt crisis...are we now gonna get a replay of the Asian Crisis of 1997/98? Only now it won't just be Asia.
Is the Fed prepared to risk this?