FYI | Oct 22 2012
– China not a problem
– Slowing growth elsewhere in emerging markets is
– Danske Bank fears global GDP drag
By Eva Brocklehurst
Danske Bank is worried about the scaling back of reforms in emerging market countries and regards developments in South Africa as particularly fraught. The escalation of strike action in the mining industry and the increase in political uncertainty has heightened the risk there. In its evaluation of a number of emerging economies, Danske notes Hungary and Brazil present problems. Asia appears sound although India is a bit of a concern and Russia is dealing with high inflation. The bank fears that, if structural problems are developing unchecked, even improved global investor conditions will be unhelpful and these economies are likely to underperform.
Even though South Africa's economy expanded in Q212, growth was driven mainly by a resumption of mine production after a series of strikes. Danske expects South African economic activity will deteriorate in the last two quarters of this year and the mining sector will be a serious drag on growth in Q3, as production is disrupted by strikes. It says labour unrest seems to be spreading and paralysing the domestic economy at the same time as the global economy deteriorates. Meanwhile, upside risks to inflation have increased from rising fuel and food prices and ongoing weakening of the South African rand.
Brazil has continued its slowdown, not helped by the macroeconomic conditions for its major export partners – Europe, US and China. Danske is not confident in taking its 2012 GDP forecast above 1.4% but is much more confident about 2013, expecting the economy to expand by 3.4% year-on-year. Danske notes Brazil was also one of only two countries (the other being the UK) to record a rise in the OECD's composite leading indicator in August. However, what is of concern is Brazil's relatively high current account deficit, recently at around 2% of GDP. Nevertheless, exports should be helped by the weak Brazilian real as well as the increase in commodity prices.
Meanwhile, China's GDP growth in Q212 is seen down from 8.1% to 7.6%, and to weaken further to 7.4% in Q3 [which it has]. Danske notes this weakness is driven by slower export growth, inventory cuts and lower manufacturing investment. On the other hand, the property market has stabilised. Danske still believes growth will pick up gradually from Q4. This should push GDP to 8.5% in 2013 from 7.7% in 2012. Moreover, there is increasing uncertainty about the central bank's continued willingness to ease monetary policy. China cut rates by 25bps in early June and early July but since then no further monetary easing has been announced. Part of the explanation, Danske feels, could be concern about the rebound in the property market. While another 25bps of easing may be looking less than certain, Danske sees fiscal easing being stepped up and this should add to GDP over the next year.
Next door, there is an increasing risk of a bubble in Hong Kong's property market, the bank maintains, with real interest rates negative and major capital inflows from mainland China. Danske notes the government is taking steps to address this, including raising the required down payment for property purchases, introducing a 15% duty for apartments sold within six months of purchase, and raising the loan-to-value ratio for new mortgages. While inflation has finally started to ease, after peaking above 6% last year, it remains relatively high in Hong Kong.
Other economies that have some resilience include Thailand, where GDP growth has so far beaten expectations. Danske says slower global growth should start to take its toll in H2 and expects GDP to expand 5.5% in 2012 and ease moderately to around 4.3% next year. Also, GDP growth in Malaysia has accelerated slightly to 5.5% in Q2 from 4.8% in Q1. Danske notes fiscal policy has strengthened domestic demand as the UMNO-led government is preparing for a general election before March 2013.
Indonesia continues to perform well on the back of resilient domestic demand. Danske expects GDP growth in 2012 to ease only slightly to 6.1%, from around 6.4% in 2011. In 2013, it expects GDP to accelerate to around 7%. Despite resilient growth, inflation appears to be contained, with both headline and core inflation edging down to the central bank's 3.5-5.5% target. Danske sees tentative signs of overheating, although inflation remains contained, and notes Fitch and Moody's have recently upgraded Indonesia's debt to investment grade.
Contrast this with India where JP Morgan sees the country having narrowly averted a downgrade. The broker believes India has not tackled the structural impediments to investment and the fiscal deficit, keeping the country in a stagflationary environment. That may be changing, JP Morgan hopes. It cites recent news as helpful – the government appears close to setting up a National Investment Board to expedite clearances and infrastructure investment, while crucial meetings in the coming weeks could determine whether the Goods and Services Tax (GST) is passed in 2013. Progress on these issues will likely sustain capital markets and the rupee, JP Morgan said, flagging the rupee's appreciation by 5 % over the last five weeks and thereby becoming the best performing emerging market currency over that period. Growth in India has slowed relatively sharply, faced with weaker exports and the Reserve Bank of India's monetary tightening and Danske sees considerable downside risk. It notes India has limited scope to ease fiscal and monetary policy, with a high budget deficit and relatively stubborn inflation. Danske expects GDP growth to decline to just 5.5% in 2012 and recover moderately to 6.4% in 2013. Lower food price inflation is the main reason for the decline but a poor monsoon suggests that food price inflation will remain elevated in the coming months.
To even more pessimistic forecasts and the former eastern bloc country, Hungary, has had almost no growth since 2006. Danske sees no clear signs of a recovery and is of the belief that Hungary’s lacklustre growth is attributable to a continued deterioration in supply-side conditions in the Hungarian economy. Danske expects Hungarian GDP to contract by 2% in 2012 and a further 1% in 2013. An additional concern is Prime Minister Viktor Orban's statement that his government cannot accept the IMF terms for a new loan deal for Hungary. Renewed uncertainty is likely to contribute to volatility in the Hungarian markets.
Meanwhile, Danske says the eurozone crisis is now clearly having an impact on the Polish economy and forecasts GDP growth of 2.4% in 2012 and 1.9% in 2013. The construction sector has been hit hard and activity in the sector has slowed dramatically. Danske expects no growth in investments for the remainder of 2012 and only a moderate recovery in 2013 and 2014.
The Czech economy remains in recession and the outlook is not promising. According to Danske, the main drag on growth was a marked slowdown in household and government spending. Exports continued to make a positive contribution to growth but could not compensate for the sharp fall in domestic demand. The bank expects GDP growth to weaken further in the last two quarters of 2012 and the Czech economy to contract by around 1.3%, with a modest rebound in 2013.
For the Russian economy, Danske is keeping 2012 GDP growth forecasts at 4.1% but expects economic growth to slow down to 3.5% in 2013. Industrial production was up 2% in September versus a rise to 2.1% in August while manufacturing expansion slowed to 3.3% from 4.1% over the month. Yet, Danske notes Russian industrial production has good prospects for growth in H212 as domestic demand is still growing. The unemployment rate fell to its post-USSR lowest at 5.2% in August and Danske expects low unemployment in combination with growth in real wages will underpin consumption, despite accelerating inflation. Inflation remains a big concern as it accelerated in September to 6.6% from 5.9% in August and the post-Soviet low of 3.6% in May. Danske notes, despite most major emerging economies easing monetary policies to revive slowing growth, Bank Rossii has begun to sound more hawkish to address the inflation issue. However, Danske does not see this as having much impact on price growth, which is coming from a poor competitive environment and price hikes by state monopolies.
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