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Emerging markets slowdown fuels concern for global outlook

Published:Wednesday | October 15, 2014 | 12:00 AM

By James Kynge in London and Chris Giles in Washington

Growth in emerging markets is at its lowest ebb since the aftermath of the financial crisis due to a combination of China's fading dynamism, a sputtering performance in eastern Europe and Latin America's slowdown.

Evidence that emerging economies are entering a new era of slower growth will fuel concerns for the global outlook as western countries continue to struggle, the oil price lurches towards a four-year low and eurozone stalwart Germany suffers from declining growth.

Data from 19 large emerging economies collated by research firm Capital Economics show that industrial output in August and consumer spending in the second quarter fell to their lowest levels since 2009. Export growth in August also plunged. These trends are contributing to a sense that slower growth is becoming a permanent fixture among the world's most dynamic group of economies.

"This is the new normal," said Neil Shearing, chief emerging markets economist at Capital Economics. "For the rest of the decade this is it. This is as good as it gets."

Speaking last week at the International Monetary Fund's annual meetings, Olivier Blanchard, the fund's chief economist, said there had been "a fairly major change in the landscape" for emerging markets in the medium term.

Christine Lagarde, the IMF's managing director, said there was "clearly a major slowdown in countries like Brazil and Russia", pointing out that the end of quantitative easing would send shockwaves to emerging economies.

"We're going to continue to caution a lot of the emerging market economies . . . to just prepare themselves for a bit more volatility than we have observed over the last few months," she said.

George Magnus, senior adviser to UBS, noted that the IMF had revised downward its forecasts for EM growth on six occasions since late 2011.

Although official gross domestic product statistics for the third quarter have yet to be published, projections are bleak. China's GDP annual growth rate in the quarter - due to be announced next week - is set to plunge to 6.8 per cent, down from 7.5 per cent in the second quarter, according to Jasper McMahon of Now-Casting Economics. Brazil is on track to report GDP growth of 0.3 per cent this year, down from 2.5 per cent in 2013, according to Now-Casting. Capital Economics forecasts an aggregate EM growth rate of 4.3 per cent in July, down from 4.5 per cent in June, and preliminary numbers for August suggest a further slowdown.

"It looks like August is going to be the weakest month in terms of emerging markets' GDP growth since October 2009," Mr Shearing said.

The most rapid deterioration has come in eastern Europe, where a faltering German economy has clobbered the companies that form its industrial supply chain. In Latin America, industrial output contracted in August, partly due to dwindling demand for commodities from a slowing China and partly due to slower consumer demand amid high inflation. Emerging Asia remains the most resilient region, posting industrial output growth of 5 per cent in August, compared with an EM average of 2 per cent, according to Capital Economics.

Michael Power, strategist at Investec Asset Management, names the tapering of QE by the US Federal Reserve and slowing commodity demand from China as the "two moons" responsible for the ebbing tides of EM growth.

However, he sees the slowdown as cyclical in nature. He said demographics, infrastructure development and the rise of the urban middle class would eventually overwhelm this weakness. "We need to be careful before we throw all the EM babies out with the now draining QE bath water."

(c) The Financial Times Limited 2014