Emerging Markets: The Third Wave of Economic Failure
First came the Global Financial Crisis of 2007 and 2008, which hit the United States (US) especially hard. Second came the European Debt Crisis, originating in 2009 in the peripheral economies of the European Union (EU), namely Greece, Spain, Portugal, Ireland, and Cyprus. Will emerging markets in Asia, the Middle East, Africa, and South America constitute the third wave of economic failure? The future of the emerging economies is far from clear, but it appears that in general, with the notable exception of India, they will continue to struggle to grow in the near term.
Considering China, according to the Purchasing Managers’ Index (PMI), which measures the strength of a country’s manufacturing sector based on new orders, inventory levels, production, supplier deliveries, and employment numbers, the country’s number is down to 48.6; anything under 50 signifies economic contraction. Additionally, as per China’s official statistics, this decline may be worsening. The commodities markets also predict weak industrial growth for China in the coming months. The price of iron ore and steel rebar in the futures market for May 2016 continue to fall to new lows. Investors thus lack confidence that the manufacturing sector will grow.
In Indonesia, according to PMI numbers, the manufacturing sector is also contracting. According to Markit, a provider of financial information, the key drivers explaining the lower numbers are declining buying activity and increasing unemployment. Malaysia is following the same trend, as new orders have declined at the fastest rate in the PMI series’ history. This manufacturing contraction, led by falling global demand, will likely hurt these economies’ Gross Domestic Product (GDP) numbers, which rely heavily on strong export trade.
India, however, unlike China, Indonesia, Malaysia, and other developing Asian countries, is in a stronger position. Quarterly year-on-year GDP has risen by 7.4%, above forecasts, which means that India is now growing faster than China. The Royal Bank of India cut interest rates four times in the past year, which helped boost the economy.
Countries in the Organization of the Petroleum Exporting Countries (OPEC) in the Middle East, Africa, and South America will also continue to struggle, given low global oil prices. West Texas Intermediate crude oil and Brent crude oil, two benchmarks of oil pricing, are trading at 41 dollars and 44 dollars per barrel respectively, relatively low prices. Moreover, there is no indication that oil prices will increase in the near future, especially as Iran prepares to increase oil production.
Brazil in particular is suffering a serious downturn. In the third quarter, GDP declined 1.7%, quarter-on-quarter. This is the third quarter in a row that the country’s economy reported negative growth. The year-on-year decline will be even higher.
The future of foreign investment in emerging markets generally is also looking dismal. According to Deutsche Bank, emerging market funds have lost 49% of 2004-2013 inflows, and it appears that the trend will continue. If investment is a sign of confidence in developing markets, this is a signal that investors have little faith in the near-term prospects of emerging market growth opportunities, which had become popular investment destinations after the Global Financial Crisis.
The future for global emerging markets is therefore bleak, but not disastrous. After the Global Financial Crisis and European Debt Crisis, emerging markets are consequently now facing the fallout of low global demand, falling oil prices, and weakened manufacturing sectors. The effect will not be catastrophic, but, in the near-term, many developing countries around the world, except for India, will struggle to maintain previous rates of high growth.