IFIs on the EM growth outlook
Date:09Jun2017
Since around the second half of last year, growth prospects in emerging markets/developing economies (EMDE) have improved. But there is a lot of uncertainty over whether this is just a cyclical uptick or the beginnings of a new secular trend – a question that nowadays we are also asking ourselves.
In their latest reports, the two top IFIs — first the IMF in April in a chapter in its flagship WEO report, and now the World Bank in its flagship GEP report — offer some clues. As far as we can see it, they both sound skeptical that we are seeing the beginnings of a new secular growth trend. (Click here for a lengthy FT piece on the issue done in late February.)
The IMF’s focus chapter is on the impact of a changing external environment on the EMs, which is turning not necessarily negative but less buoyant. Its conclusion and advice is familiar: “Faced with a potentially less supportive external environment than in the past, emerging market and developing economies can get the most out of a weaker growth impulse from external conditions by strengthening their institutional frameworks and adopting a policy mix that protects trade integration; permits exchange rate flexibility; and ensures that vulnerabilities stemming from high cur- rent account deficits and external debt, as well as high public debt, are contained.” [p.88]
In a similar vein, the Bank says that a number of factors “weigh on longer-term EMDE growth prospects, including structural headwinds to global trade, worsening demographics, slowing productivity growth, and governance and institutional challenges. Even if the expected modest rebound in investment across EMDEs materializes, slowing capital accumulation in recent years may already have reduced potential growth”. [p.5] (The latter was also the subject of a recent FT editorial; see also this for an earlier warning from Bank economists).
Actually, when you think about it, there are roughly two episodes during which the EMDEs widened the growth spread vis-à-vis the advanced countries – the 1990s and the 2000s, the latter being markedly more persistent and stronger (see picture, source IMF, PPP-weighted data). There is little reason to expect that we’ll go back to a 2000s-type trend because of a very different external environment, a slowing Chinese economy, lack of reform and so on. At the end of the day, we just seem to be undergoing another “carry-trade” cycle, which tends to last much shorter and means that only those EMDEs that focus on their “homework”, will manage to do well or decouple positively.
Put differently, with “push” factors having weakened, to use the old jargon, it is time to turn to domestic fundamentals or the so-called “pull factors”.
