Emerging markets see growth slowing

Growth in emerging markets slowed slightly in the first three months of 2011 due to slower expansion in both manufacturing and services as emerging market companies contend with an ever higher cost burden, the new HSBC Emerging Markets Index (EMI) shows.

Inflation is the main risk to growth in 2011 in these markets, the report says. It is in danger of becoming an entrenched problem while the pace of growth, although perfectly adequate, has lost momentum, it adds.

Input cost inflation across the emerging world quickened to its strongest level in almost three years, reflecting the boost to commodity prices from infrastructure investment, higher food prices due to demand supply imbalances and the global impact of monetary policy in the United States.

The EMI dipped to 55 from 55.7, but remained broadly in line with the long run series average of 54.9.

‘We are at a critical moment when policymakers take a deep breath and hope that their decisions can tame prices. Rising inflation and fading growth are hardly an encouraging combination and the hope must be that the loss of momentum will eventually temper inflation,’ said Stephen King, HSBC’s chief economist.

‘It now appears that the West’s bid to kick start the global economy through experimental monetary stimulus has opened a Pandora’s Box of economic distortions, creating unexpected policy challenges for emerging nations. Seeking to avoid currency appreciation from several interest rate rises, they’re pursuing what HSBC has termed quantitative tightening (QT) through measures such as raising banks’ reserve ratios. QT takes us to the outer reaches of macroeconomic experimentation but if it slows the pace of emerging market growth, commodity price inflation may eventually be checked,’ he explained.

‘This would provide huge benefits to emerging nations, not least by alleviating the social and political pressures of income inequality that stem from higher food and energy prices, part of the reason for recent uprisings in the Middle East and North Africa. Our latest HSBC forecasts are consistent with the idea that QT will constrain activity. We expect GDP growth in the emerging world to moderate to 6.3% this year from 7.5% in 2010,’ he added.

Factories across Eastern Europe remained busy in the first quarter, with production growth hitting series record highs in the Czech Republic and Turkey, the latter for a second successive quarter. Russia saw manufacturing output rise at the strongest rate in three years, while growth held steady at a near-record rate in India. Taiwanese and South Korean manufacturers saw a strong rebound in activity but Singapore saw only a slight expansion in output, and growth eased markedly in China.

Growth of manufacturing production was supported by a continued expansion of new export business, which increased at the fastest rate in three quarters. However, the rate of expansion was much weaker than that seen one year earlier. The Czech Republic, India, Poland, Turkey and Taiwan all recorded steep increases in new export orders, while growth was solid in Hong Kong, Saudi Arabia and South Korea. In contrast, growth was only slight in Brazil and China.

Service sector activity grew at a sub-par rate in the first quarter with growth easing to a seven quarter low. This, the report says, reflected slower expansion in China and Russia, with the former registering the weakest increase in business activity since the start of the series in the last quarter of 2005. Brazil recorded a moderate expansion, while India again led the pack, with growth the highest in three quarters.

Emerging market service providers remain confident about the one year business outlook, although the degree of optimism was muted compared with historical data. Positive sentiment in the Indian service sector was the highest for three years, while Russian business optimism was broadly in line with the long-run trend. In contrast, Business Expectations indexes for Brazil and China were around eight index points lower than their respective long run trends, continuing the trend seen in the fourth quarter of 2010.